ICRA upgrades steel sector’s outlook due to improving demand and prices

Investment information firm ICRA has upgraded its outlook for the Indian steel sector to stable on the back of improving demand and prices.

The domestic steel sector witnessed a strong revival in the second quarter of 2020-21, it said. This is result of a combination of factors like a strong retail demand emanating from a thriving rural economy, and green shoots of recovery in white goods and the automobile sector — especially from tractors, passenger vehicles and two-wheelers.

The momentum strengthened further in December quarter. The cumulative domestic steel demand in October and November has already surpassed the pre-COVID-19 levels, said ICRA.

“We are gradually seeing a more broad-based pick-up in economic activity with every passing quarter, which makes us believe that the recovery in domestic steel demand would sustain in the near term at least,” said Jayanta Roy, Senior Vice-President and Group Head for corporate sector ratings.

“The revival in demand has been surprising, and the steel industry’s ability to claw back to the pre-Covid levels of demand within six months of a global pandemic outbreak has been remarkable.”

Consequently, ICRA revised its FY21 steel demand forecast to a contraction of around 12 per cent, significantly better than its initial forecast of a 23 per cent contraction made in April. The sector outlook is also revised to stable from negative.

ICRA said the share of top six steel producers in total crude steel production, which remained at about 55 per cent historically, has risen to about 65 per cent in recent months.

Also, as against the average industry capacity utilisation of 78 per cent for the period FY16-20, the same for the top six steel producers touched a high of 85 per cent in October. The other steel producers are still operating at capacity utilisation rates of about 65 per cent.

These trends indicate the rising dominance of large steel players in the domestic industry and an adverse impact of the pandemic on the business performance of some of the smaller steel producers, which will find it difficult to operate at pre-Covid levels in the near term.

At the same time, domestic hot-rolled coil prices have been revised upwards multiple times in recent months and are ruling at a multi-year high level of Rs 49,000 per tonne.

Price hikes have been supported by improving demand from the automobile and white goods sectors, rising international prices and a cost push in the form of higher domestic iron ore prices following the supply disruption in Odisha.