Source: The Economic Times

Date: 6 August 2019

India Ratings and Research (Ind-Ra) has said there is a moderate risk of global trade war with domino effect due to US trade restrictions on steel imports but rebounding steel margins could help domestic steel companies withstand the challenges.

In its latest report on the steel sector the agency said on Monday it does not expect margins of domestic players to be under threat in the near term as less than 10% of the India’s surplus steel capacity caters to the export markets, primarily Europe and neighbouring countries. While potential correction in input prices and China’s supply discipline will benefit the margins, an unexpected retardation in Chinese demand growth and increased intensity of global trade war could counter the improvement in margins.

However, the impact could be felt through negative sentiments in the international markets and oversupply due to diversion of supply by countries exporting to the US to other importing countries.

Ind-Ra said it expects further deleveraging of balance sheet of steel companies in FY19 backed by sustained margins coupled with absence of funding of loss by debt. At the same time, resolution of stressed steel companies will lead to debt reduction due to haircut taken by lenders as well as expected improvement in margin on change of management.

However, debt-led capacity expansion over and above the inorganic expansion will result in steady leverage for a few large players.

The agency said a cut in Chinese steel capacity of 100 mt-115 mt over 2016-2017 has led to a shift of new production volumes to the central region that is rich in coal resources, though it is located away from ports from north eastern regions which are high on pollution. With regard to input prices, Ind-Ra said it expects average price of coking coal to be around USD170/tonne in FY19. However, given the concentrated nature of coking coal mining sector and the risk of natural calamity (severe tropical cyclone) in Australia, the prices can remain volatile for certain months in a year depending on disruption in supplies. However, the long-term sustainable price of coking coal is estimated to be USD120/tonne.

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