India Ratings maintains negative outlook on steel and base metal sectors, recovery in 2HFY22

MUMBAI: India Ratings and Research (Ind-Ra) has maintained a negative outlook on the steel and base metal sector for the rest of FY21 and it expects an operational recovery to pre-Covid levels gradually by the second half of FY22.

“While domestic demand was showing initial signs of recovery in mid of the September quarter, with the unleashing of pent-up demand, its sustenance would depend on a macroeconomic pick-up from timely government reforms and stimulus to push up domestic consumption and investment activity,” said the report by Ind-Ra.

Government’s increased investments in infrastructure, especially frontloading of Rs 100 trillion infrastructure investment plan could be a key steel demand growth driver, it added.

On the base metal sector, the rating agency said that business disruptions led by Covid-19 are likely to persist over the next six-to-nine months, as the pandemic scenario continues to evolve.

“Realisations are likely to remain volatile over 2HFY21 and remain predisposed to the US-China trade tensions,” the report said.

According to Ind-Ra, large steel layers could recover earlier than FY22.

“The liquidity position of large integrated players is likely to remain adequate, while already stressed mid-sized and secondary steel producers would face elevated liquidity stress,” the report said.

One of the important raw materials in steel making, iron ore, could get much costlier due to the supply disruptions.

“Iron ore prices could increase further with only five out of the 19 Odisha iron ore mines, which were auctioned in March 2020, being operational as of date,” said Ind-Ra.

Iron ore availability in the second half of FY21 would depend on the pace at which new merchant miners in Odisha ramp-up their output and ex-mine owners to dispose of accumulated stock.

“This could lead to an increase in raw material cost per tonne given the high auction premium on new mines and/or a delay in ramp-up of these mines and increased demand for procurement from existing merchant miners,” the report said.

For the base metal sector, Ind-Ra observed that Key domestic players will report improved credit metrics by end of FY22, close to FY20 levels, primarily driven by increased demand from end-user industries, supported by government stimulus and thus, improved profitability, the report said.

“Sustainable cost reduction measures shall enable players to emerge stronger. Liquidity management including refinancing of debt maturities, capital expenditures and dividends outgo shall remain key monitorables,” Ind-Ra said.