According to media reports, Indian rating agency India Ratings and Research has revised its outlook on the steel sector from stable to stable-to-negative for the remainder of the 2019-20 financial year (FY 2019-20) due to lower steel demand growth driven by the risky environment in automotive and real estate construction sectors. The agency has also revised its steel demand growth expectations for the same financial year from seven percent to four percent, which remained at eight percent in the 2018-19 financial year.
The agency’s outlook factors in higher import risks from the countries which India has Free Trade Agreements with, such as Japan and South Korea, driven by the negative effects of slower global growth and ongoing trade frictions. The agency also stated that, if the uncertainty about iron ore mine auctions continues, raw material availability and price risk might increase in the fourth quarter of FY 2019-20.
Indian Ratings and Research expects total steel sales volumes and margins to loosen further in the second quarter of FY 2019-20 due to margin correction in the industry in the fourth quarter of FY 2018-19 and in the first quarter of FY 2019-20.
On the other hand, the agency believes that steel demand will recover in the second half of FY 2019-20 driven by an increase in government investments, fiscal stimulus measures and market sentiment improvement. The agency added that new capacity additions in FY 2019-20 will help balance the demand-supply situation in the second half of the year.
"Steel prices have been continuously softening while raw material cost prices have only seen partial declines, thereby squeezing the gross spreads for steel producers," the agency said.