Steel consumption is expected to decline at least 10 per cent for rated Indian steel-makers in the 12 months to March 2021, due to the adverse effect of coronavirus pandemic on the economy, says a report. According to Moody's Investors Service, in India, new capacity additions will take a back seat as weak steel consumption will hurt free-cash-flow generation in the current year.
The agency further noted that consolidation in the Indian steel sector that began in 2018 will continue in 2020. Moody's Investors Service in a latest report has forecast a negative outlook for the steel industry in the Asia Pacific region. According to Moody's Investors Service, India's (Baa3 negative) economic growth will remain materially lower than in the past, with real GDP contracting 3 per cent in 2020.
"We assume that economic activity will begin to gradually pick up from July. However, given the possibility for second or third waves of virus infections or deeper economic costs than currently factored in, downside risk to these forecasts are significant," the agency said.
Moody's estimates that lower GDP growth will translate into steel consumption falling at least 10 per cent for rated steel-makers in the 12 months to March 2021. This decline is largely driven by plummeting automaker demand, and weakness in construction, infrastructure and shipbuilding.
"India will remain the world's second-largest steel producer behind China after having overtaken Japan in 2018. But new capacity additions will take a back seat with weak steel consumption hurting free-cash-flow generation in the current year," it said. The agency noted that consolidation in the Indian steel sector that began in 2018 will continue in 2020, with five stressed steel companies accounting for 20 per cent of the country's steel-producing capacity operating under new ownership.
"We do not expect new capacity until the industry's profitability as well as cash-flow stability is restored to pre-pandemic levels. Capacity utilization will widely vary across the industry," it added. According to the ratings agency, the steel-makers will seek to divert their surpluses to relatively open export destinations, following the decline in domestic consumption.
"Steelmakers will divert to markets such as Southeast Asia, Middle East, parts of Southern Europe and China for exports. However, export realizations will be lower than realizations on domestic sales, with the latter benefitting from import parity prices and anti-dumping duties," it said.
Further, the strongest steel-makers will likely increase utilization rates from 50 per cent in April to more than 80 per cent by the end of March 2021, it said.