According to ICRA's latest research note on the steel sector, domestic steel demand is expected clock a double-digit growth of around 11.3% in FY2023, following an 11.5% growth recorded in FY2022. Domestic steel consumption growth has remained strong throughout FY2023 supported by the Government's push for infrastructure-led economic growth. With the Central Government's capex outlay poised to increase by 37% year-on-year (YoY) in FY2024, ICRA has revised upwards its steel consumption growth estimate for FY2024 to 7-8% from 6-7%.
Commenting on the industry trend, Mr. Jayanta Roy, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA said, "FY2023 will witness two significant milestones for the steel sector. Firstly, the Central Government's current year capex is expected to touch the average annual run-rate envisaged in the National Infrastructure Pipeline for the very first time. Secondly, the sector will be witnessing two back-to-back years of double-digit steel consumption growth rates after a gap of more than a decade. The last time this rare feat was achieved was in FY2010/FY2011. While private sector investments have generally remained muted at present, the Government's capex drive has helped maintain the industry's capacity utilisation rate at an estimated 79% in FY2023. With steel consumption expected to grow in high-single digits next year, we expect the industry's capacity utilisation rate to improve to around 80% in FY2024, despite the commissioning of some new expansion projects."
International steel prices reached a nine-month high in the second week of March 2023 as easing of Chinese lockdown restrictions led to a pick-up in economic activity for the world's largest producing and consuming nation. Chinese HRC export offers have increased by ~15% in Q4 FY2023 so far, and domestic HRC prices have also mirrored the global trend, increasing by ~10% in the same period.
On the input cost side, reflecting the trend in domestic steel prices, landed cost of lump ore from NMDC's mines in Chhattisgarh is poised to sequentially increase by ~7% in Q4 FY2023 as export viability increases. Notwithstanding this increase, secondary steel players are likely to witness a significant relief on input costs as the landed cost of imported thermal coal prices sequentially soften by around 20% in Q4 FY2023. For blast furnace operators, the cost scenario would be different, as imported premium hard coking coal landed costs are expected to sequentially increase by around 7-8% in Q4 FY2023.
Therefore, while steel companies across the spectrum would record sequentially higher realisations in the fourth quarter, divergent trends in iron ore, thermal, and coking coal prices would have a mixed impact on earnings of various steel players, depending on their raw material mix. ICRA's analysis suggests that moderation in thermal coal prices can potentially lift the operating profits of secondary steel producers by around 10 percentage points sequentially in Q4 FY2023. However, fourth quarter earnings of blast furnace players would be largely driven by a sequential growth in despatches, as a rise in coking coal costs would limit the scope for further margin improvement.
The trends on the steel trade flows reveal that following the withdrawal of export duties in November 2022, monthly finished steel exports have doubled to around 0.6 million tonne (mt) in Q4 FY2023 from the November 2022 lows of 0.3 mt. Commenting on this trend, Mr. Roy added, "While this pick-up is encouraging to see, the near-term growth opportunities in the overseas markets look challenging as, barring possibly China, most of the other leading steel-consuming hubs are likely to witness anaemic growth in steel consumption in CY2023. Therefore, India's finished steel exports, after an estimated 51.5% steep decline in FY2023, are expected to witness only a modest growth of 3-4% YoY in FY2024 due to muted external demand". On the other hand, steel imports have risen throughout FY2023 as trade flows get diverted to high-growth markets, leading to India becoming a net finished steel importer for five months in a row between October 2022 and February 2023. Overall, finished steel imports in FY2023 are expected to increase by over 30% YoY, and thereafter by 5-6% YoY in FY2024.
Fresh steel capacities accumulating to ~35-40 million tonne per annum are lined up for commissioning by FY2026. Therefore, with the industry's earnings moderating, dependence on external financing to meet committed expansion plans is likely to increase going forward, early signs of which can be observed in the 22.5% increase in the steel industry's bank borrowings during the first 10 months of FY2023. Consequently, the industry's leverage (total debt to operating profits) is expected to deteriorate to an estimated 2.0-2.5 times in FY2023/ FY2024 from 1.1 times in FY2022. However, this is still lower than the industry's leverage level of 2.9 times recorded during the previous upcycle of FY2019. Therefore, in ICRA's opinion, steel companies today are more resilient to withstand any worsening of the macroeconomic environment next fiscal.