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Steelmakers to report better earnings and improve utilization in H2 of FY22: Analysts

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The Economic Times
11th June, 2021 20:45 IST

Indian steelmakers are likely to witness better earnings and capacity utilisation levels in the coming quarters of FY 22 mainly on account of buoyant steel prices which touched record high levels despite weak domestic demand in the first quarter due to the second wave of the pandemic. “Despite weak domestic demand, buoyant international demand and steel prices supported the domestic steelmakers and India remained a net exporter of steel with 122% Y-o-Y growth in exports reported in April 2021,” rating agency ICRA said in a report on Friday

While the ongoing second wave of the pandemic has caused the demand outlook to continue to be weak and uncertain in H1FY22, it is expected to spike in H2FY22 on account of a revival in the construction and real estate sectors, green shoots in which are already visible, said Brickwork Ratings in a report titled ‘Drishtikone’ on Friday.

As per analysts from ICRA, the second wave of the pandemic has hit domestic steel demand in the current year, with a 22% month-on-month drop in April 2021, and a further 1% sequential decline reported in May 2021. However, the current year consumption data looks far better compared to last year which is a 150% growth in April-May 2021 because of the much more stringent lockdowns observed during April-May 2020.

With the gradual lifting of lockdowns/mobility restrictions in India in June 2021 and improving vaccination coverage, ICRA expects domestic demand to recover in the coming months, which in turn would result in a pick-up in capacity utilisation levels. In April 2021, the steel prices saw an uptrend when the Hot/Cold Rolled Coil (HRC/CRC) prices in Mumbai were revised upwards by around Rs 5000/- per tonne, thus touching a record high of around Rs 70,000 and 83,000 per tonne, respectively.

Domestic flat-steel prices have nearly doubled to Rs 72,000 per tonne in June 2021 from Rs 38,000 per tonne in June 2020. In comparison, long-steel prices rose 1.4 times to Rs 57,900 per tonne. The reasons are said to be the higher prices of raw material globally and lower exports from China, the largest steel producer.

“Domestic steel prices are still at around a 20%-25% discount to the international price and are around 15%-20% lower than the landed cost of imported steel. Domestic steel players continue to remain optimistic about the increase in steel prices in future as well,” said Brickwork Ratings in a report.

Analysts expect the demand in the auto sector to rise in the festival season in the second half. “Steel producers worldwide will achieve a substantially improved operating performance and strong free cash flow based on significantly higher volumes and prices,” said rating agency Moody’s Investors Service in a research report titled ‘Metals & Mining – Cross Region: Firmer worldwide economic activity and demand strengthen commodity prices’ on Thursday.

Analysts from Moody’s expect steel supply to ramp up as productivity improves and new capacity comes online in certain regions of the world. “Steel prices in 2021 will settle well above historical levels supported by increased demand, higher prices for raw material inputs including iron ore,” Moody’s report said.

Taking advantage of the steel cycle, large steelmakers either planned for further capacity expansions or deleveraged substantially. “With steel prices reaching all-time high levels in the current fiscal, and industry capacity utilisation levels being expected to inch higher towards 80% in FY2022, leading steel producers, over the past one month, have announced large CAPEX plans accumulating to 31 mtpa,” said ICRA in its report.

This would entail sizeable investments of Rs. 76,500 crore spanning the next 3-4 years. Consequently, the industry’s leverage metrics are expected to moderate from FY2023 as capital deployment for fresh capacity creation gathers pace, the report added. The top 4 steelmakers, Tata Steel, JSPL, JSW Steel and SAIL reduced net debt (in their Indian operations) by Rs 34,000-35,000 crore as their Ebitda pool nearly doubled during the year, said rating agency Crisil in a sector report on Wednesday.

“This fiscal, deleveraged balance sheets will drive capacity expansion plans (both brownfield and greenfield) and CAPEX to their previous peaks,” the report said adding that the Capex deferred during the previous cycle will also kick in. “The ongoing CAPEX cycle will continue to be driven by large steelmakers, which are expected to add more than 95% of the new capacities coming on stream over the medium term,” Crisil’s report said.

However, analysts expect the steel prices to soften in the second half of FY21 globally, but the Indian steel prices would still be quoting high as compared to the levels of FY 19-20. “The price rally, spurred by China’s green policy, is likely to benefit through the first half of this fiscal, too, with flat steel prices already up 70% since April. While prices will soften in the second half, they would still be 40-45% higher on-year,” said Crisil in its report.

Moody’s in its research report said that the worldwide supply/demand imbalance for steel will persist, with prices gradually declining toward their historical averages. “Worldwide demand will ebb as customers replenish inventories and stimulus dollars wane and vaccinations allow more consumers to return to spending on experiences rather than material goods,” the report added.

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