India Steel Outlook 2010

8/8/2019 India Steel Outlook 2010

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Corporates

www.fitchratings.com 20 Ja

Metals & Mining

IndiaSpecial Report

India Steel Outlook 2010Stable but Cautious; Driving Home the India Advantage

SummaryFitch Ratings takes a stable outlook on the Indian steel industry in 2010, in thewake of a continuing improvement in steel demand and recovery in prices from thelows of Q408 and Q109 and with a resulting improvement in overall liquidity.

The agency expects demand to exceed that of 2009, but uncertainty remainsregarding the rate of growth which in turn would be driven by the timing of thewithdrawal of the fiscal stimulus and to what extent private demand picks up. Thetiming of the withdrawal of fiscal benefits, in particular, would remain critical.

With inflationary pressures likely to perculate through from food to the generaleconomy, government policies on tackling inflation through reduction in importduties could also have a potential impact on the fortunes of the industry during2010.

Fitch notes that though steel prices in India during Q409 were higher thaninternational prices driven to a large extent by the improving demand scenario inthe region and the existence of import duties the agency feels that the trend willcorrect itself over 2010, and for domestic prices to largely mirror internationalprices, notwithstanding the difference on account of import duties.

Consequently, while Fitch expects demand to improve in 2010, profitability couldcome under pressure which in turn could be accentuated by the increase in prices

of raw materials. Liquidity, however, should remain comfortable with betterworking capital management and greater access to debt and equity markets. Fitchexpects capex plans to be reactivated, which had been put on hold during 2009,though regulatory delays may continue to delay the actual spending on the ground.On balance, Fitch expects the outlook on corporate ratings to remain largely stable.

Fitch also believes that, with the kind of capacity expansion projects in the pipeline,there is the potential risk of longterm overcapacity which could put pricesunder pressure. However, the agency notes that delays on account of regulatoryapproval for land and mine allocations and the potential to export from a lowcost base could act as potential mitigants.

The Worldwide Steel Sector the Worst is Behind us, but

so may be the BestThis is an extract from Fitchs Worldwide Steel Outlook published in December2009.

Fitch Ratings expects demand for steel to recover from low levels at a modest paceover the next 1218 months, but not to reach peak levels in the medium term. Pricingshould be constrained by excess capacity, but raw material cost increases are expectedto be passed through. Excess or belowcost production should be limited.

Regional differences in steel market dynamics have reemerged, and will be amajor influence on steel producers profitability and cash flow generation.Worldwide steel trade has fallen by more than production, as a result of sharplylower demand in importing nations, coupled with low capacity utilisation and short

lead times at domestic steel mills. Producers relying on exports will be exposed toprice competition approaching marginal cost; intensifying trade barriers; andcurrency fluctuations.

Ratings

National SectorCoverage

National LongTermRating/Outlook/ShortTerm Rating

Adhunik Alloys andPower Limited

BB+(ind)/Stable/F4(ind)

Adhunik CorporationLtd

BB(ind)/Stable/F4(ind)

Adhunik MetaliksLimited

A(ind)/Negative/F2+(ind)

Ambica Steels

Limited

BB+(ind)/Stable/F4(ind)

Asian Colour CoatedIspat Limited

BBB(ind)/Stable/F3(ind)

Bhushan Power &Steel Limited

A(ind)/Stable/F2+(ind)

Bhushan SteelLimited

A(ind)/Stable/F1(ind)

Brahmani RiverPellets Limited

BB+(ind)/Negative

GontermannPeipers(India) Limited

BBB+(ind)/Stable/F2+(ind)

ISMT Ltd A(ind)/Negative/F1(ind)Mahindra UgineSteel Company Ltd

BBB+(ind)/Negative/F2(ind)

Rashtriya IspatNigam Limited

AA(ind)/Stable/F1+(ind)

Rungta Mines Ltd.(RML)

AA(ind)/Stable/F1+(ind)

Rungta Sons Pvt Ltd AA(ind)/Stable/F1+(ind)

Steel Authority ofIndia Limited

AAA(ind)/Stable/F1+(ind)

Tata Steel Limited AA(ind)/Negative/F1+(ind)

Usha Martin Limited A+(ind)/StableUttam Galva SteelsLtd. (UGSL)

A(ind)/Stable/F1(ind)

Vikash Metal andPower Limited

BBB(ind)/Stable/F3(ind)

Analysts

Vibhash Awasthi+91 22 4000 [email protected]

Ashish Upadhyay+91 11 4165 [email protected]

Rohit Sadaka+91 33 [email protected]

Related Research

Worldwide Steel Outlook (December 2009)
http://creditdesk/reports/report_frame.cfm?rpt_id=491562


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India Steel Outlook 2010January 2010 2

Steel producer earnings were severely affected over the past year, but mostcompanies rated by Fitch improved their liquidity through cost reductions, workingcapital management, dividend reductions, spending reductions, capital raisings,

and/or credit facility amendments. These measures should serve well over thisperiod of slow recovery, and financial leverage should decline over the year.Ratings remain under pressure given the severity of the downturn and limitedvisibility on the recovery.

Fitch continues to monitor recovery in each market, and assesses each IssuerDefault Rating (IDR) and Rating Outlook based on the issuers ability to return to itsaverage credit profile given its operations, strategy, competitive position, capitalstructure, and liquidity.

Global steel production peaked in May 2008, whereas real global demand likelypeaked in 2007. For the world excluding China, Fitch does not expect demand toreach peak levels again until 2013 at the earliest given the declines expected inconstruction for developing nations, and the slow recovery in other manufacturing

sectors (eg autos).

Iron ore also continued to display price volatility during 2009. With China fixing uplongterm contracts for iron ore during H209, this benefited Indian exporters. InChina, landed spot prices of iron ores imported from India have been increasingsince October to over USD100 per tonne. Fitch believes that the 2010 benchmarkiron ore price settlement will be in the range of 15%20% higher than the currentbenchmark of USD54/metric tonne (mt) free on board (FOB) contract price settledby Vale, or the USD62/mt FOB contract price settled by Rio Tinto in 2009.

Fitch expects benchmark hardcoking coal contracts to be settled about 30%50%higher for JFY2010 than JFY2009, reflecting currency movements as well as tightsupply. The wide range allows for more swing production, including that from China.

Fitch believes steel prices will approximate the marginal cost of production, whilecapacity utilisation is below 75%. Given expectations of increased iron ore andmetallurgical coal prices, Fitch believes US hotrolled sheet will trade at an averageUSD600/mt in 2010.

India in the Global ContextDespite facing severe demand pressure during Q408 and Q109, the domestic steelindustry has recovered faster than its global peers. Furthermore, manufacturersexposed to domestic markets fared relatively better than those which were exportfocused. Once the impact of highcost inventory was absorbed in Q109, most Indiansteel manufacturers were able to improve their margins in subsequent quarters on account of improving demand.

Fitch also notes that while many steel majors postponed or delayed their expansionplans in 2009, these plans could be reinitiated in 2010 though most of the spendmay actually occur beyond end2010. This could potentially put pressure onleverage post2010.

Consumption and Demand Set to GrowIndias per capita consumption of steel at approximately 45kg remains considerablybelow the global average of 200kg. This provides a huge potential for an increase indemand in the country, as steel demand has a strong correlation with the GDPgrowth rate. With Indias GDP growth rate expected to be higher in 2010,consumption of steel is likely to grow to 60 million tonnes from 56 million tonnes in2009. During 2009, exports contributed another 3.75 million tonnes.

The present gap between existing demand and supply does create an opportunityfor price increases, but this remains capped by the global nature of the product andoversupply in the global markets.

0 15 30 45 60

CY2004

CY2005

CY2006

CY2007

CY2008

CY2009

(MTPA)

India Steel Production

Estimated

Source: IISI


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Existing and Estimated Capacities Risk of LongTerm OverCapacityFitch believes that Indias steel industry may be headed for overcapacity in themedium to longterm, which could bring prices under pressure. With existing

capacity at approximately 66 million tonnes, the increase in demand couldpotentially push up prices. However, while there have been a number ofinvestments announced in the nature of greenfield and brownfield projects, someof the greenfield capacities may get delayed on account of regulatory and policyconstraints; while the brownfield projects (of approximately 33 million tonnes) aremore likely to materialise by 20112012 which could potentially lead to excesssupply. In the event that some of the large greenfield investments do come through,the risks could only increase. However, mitigating factors could include the lowcost base of the producers, which may help them to export a substantial proportionof production.

Production Set to Grow With DemandIndias steel production, which grew at a compound annual growth rate (CAGR) of

11% during 20042008, remained largely muted during 2009, reflecting the globalscenario. The effects of the economic slowdown were clearly visible in productiondata during 2009. As per the International Iron & Steel Institute (IISI), Indias crudesteel production grew by around 1.26% to 51.19 million tonnes in the 11monthperiod ended November 2009 versus the same period in 2008. However, crude steelproduction in India started recovering from March 2009, and since then monthlycrude steel production has consistently been over 4.6 million tonnes (up toNovember 2009).

0

5

10

15

20

25

30

SAIL RINL TATA

Steel India

Essar Steel JSW Steel JSPL Ispat

Industries

Bhushan

Power &

Steel

Bhushan

Steel Ltd.

Other +

secondary

steel

Existing capacity Brownfield 201112 Greenfield 201112

Steel Capacities in India 2009

(MTPA)

Source: Ministry of Steel, India

ProfitabilityFitch believes that profitability could adjust to a certain extent, but should still

remain relatively comfortable. During the Q209 and Q309, most of the steel majorshave reported a qoq increase in operating EBIDTA margins. Prices of the major rawmaterial prices, iron ore and coke, reached new highs during Q308; and withdemand estimated to have been strong during that period, steel manufacturerspiled up inventories at a high cost. With raw material prices dipping significantlyduring Q408, steel manufacturers had to face a scenario of a highcost inventorybuildup which resulted in inventory losses spanning Q408 and Q109. However,with steel prices firming up from Q209, and with the impact of the highcostinventory being relatively lighter, steel manufacturers started enjoying betterprofitability which continued through to Q309. With commodity prices firming up inthis same period, there is a possibility that steel manufacturers may not be able tomaintain the qoq trend increase in profitability.

Regulatory ChangesThe Government of India has used indirect means to control steel prices in Indiathrough duty structure and importexport regulations.

0

9,000

18,000

27,00036,000

CYQ308

CYQ408

CYQ109

CYQ209

CYQ309

Revenue Trends

Combined revenue Top 7 players

producers

(INRm)

Source: Industry

0

10

20

30

40

CYQ308 CYQ408 CYQ109 CYQ209 CYQ309

(%)

Op. EBIDTA Margins Trends


Source: Industry

0

3

6

9

CYQ308 CYQ408 CYQ109 CYQ209 CYQ309

(x)

Interest Cover


Source: Industry


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The government prevented steel prices from rising in line with international pricesduring AprilMay 2008, by removing import duties on steel and threateningcompanies with a complete ban on exports. During that period, the government

also increased export duties to 15% for various products to ensure higheravailability in the domestic market.

However, since April 2009, government has taken various initiatives to protect thedomestic industry: by removing export duties on various products, increasing importduties to check imports of cheap steel, and bringing hotrolled coils imports underlicence. This helped domestic companies to maintain higher utilisation levels, andalso to maintain a premium over global steel prices.

After seeing a 10%15% jump in steel prices during 2009, the government (duringJanuary 2010) has allowed unrestricted imports of hotrolled steel, mainly used byauto and consumer durables industries, which were planning price hike to offsetrising raw material costs. The government has also increased export duties on ironore (lumps as well as fines), to increase its supply in the domestic market which

will help in lowering the input cost for steel manufacturers.

Another key event for the industry would be when the government startswithdrawing its stimulus packages, and how quickly private demand couldcompensate for this. This will be a true test for demand situation. On the otherhand, the government will also have to take several steps to stop cheap imports which can be a concern for the secondary steel manufacturers.

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India Steel Outlook 2010