International credit ratings agency Fitch Ratings has stated that it expects Indian steel demand to contract in the financial year 2020-21. However, volumes should continue to improve over the next few quarters, led by rural consumption and government spending on infrastructure, and lead to better margins due to operating leverage, Fitch said.
“Higher prices supported by the price rebound in China should also drive margins in the second quarter of FY21 and beyond. Hot rolled steel sheet prices in China have improved by around $100/mt since April 2020, and Indian prices have started to tick up since late July, with a lag,” said Fitch.
According to Fitch, EBITDA should improve for Indian steelmakers JSW Steel Limited and Tata Steel Limited from the second quarter of the financial year ending March 2021, driven by higher volumes and wide margins, after a sharp fall in earnings in the first quarter of FY 2020-21. Utilization rates have also improved significantly, with JSW's Vijayanagar plant inching towards 90 percent and Tata Steel expecting an average rate of over 95 percent in the second quarter of the financial year for its key Indian units.
Fitch stated that the EBITDA drop was less than expected as steelmakers partly offset the sharp demand contraction in India with higher exports. However, Fitch expects leverage to remain higher for the two companies in the financial year 2020-21, and forecasts a sharp leverage decline in the financial year 2021-22, but demand-side risks remain, albeit receding.