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India Ratings and Research (Ind-Ra) said in a report that it estimates steel demand to grow in the range of 7%-9% YoY for FY24 compared to 12% in FY23. The growth is primarily driven by a continued rise in government infrastructure spending for the 2024 general elections coupled with a healthy domestic demand from other end-user industries and a moderate pick-up in export demand after the roll back of the 15% export duty by the government in November 2022, the report added.
The rating agency said that steel demand is likely to be supported by a high correlation of 0.8x-0.9x with gross fixed capital formation, which is expected to grow 9.6% YoY in FY24 as against an estimate of 11.5% in FY23. High demand growth in FY23 of 12% YoY on back of a strong domestic demand outpaced capacity addition in FY23, resulting in increased capacity utilisation for the industry. Growth in demand as well as capacity addition are likely to be in line, balancing the demand-supply scenario.
Further, Ind-Ra said that global steel prices could face headwinds in FY24, while exceeding the pre-pandemic levels. The rating agency noted that imports from China into India is not a big threat as China is likely to continue with its supply discipline policy and cut on production for 2023. Also, China’s domestic demand could increase and avoid an oversupply scenario. However, Ind-Ra expects the steel sector will continue to face headwinds from global macro trends, and a more rigorous enforcement of environmental protection policies, which will be a key monitorable.
Moreover, a decline in raw material prices due to a normal demand-supply balance and China’s recent policy to maintain low iron ore price and higher use of domestic coking coal will protect the margins. Nonetheless, a sustained slowdown in growth in major steel export region such as EU and uneven steel demand recovery from China could result in prices being range-bound in FY24.
Outlook
Ind-Ra said that it has maintained a ‘Stable’ rating outlook for its set of rated entities for FY24 on the expectation of a stable credit profile as they have stronger balance sheets on account of deleveraging during FY21-FY22 and an improvement in profitability year-on-year. The outlook is despite the expected volatility in commodity prices and debt-led capex undertaken over FY24-FY25. The agency expects steel companies’ margins to have improved marginally from FY23, when the profitability was affected negatively due to inventory loss on account of the expected sharp correction in prices.
Moreover, the balance sheet of sector participants strengthened during FY21 and FY22, enabling them to deleverage below 3x compared to pre-pandemic levels of above 3x. The rise in debt on account of higher capital expenditure is likely to be partially mitigated by a release of working capital. In addition, the rating agency said that liquidity of steel companies is likely to remain adequate, led by improved operating cash flow generation over FY24 year-on-year, although lower than FY22 levels.