Steel price decline, rising imports to squeeze primary steelmakers’ profit margins: Crisil

The operating profitability of domestic primary steel producers is expected to be affected this fiscal due to a decline in steel prices and pressure from rising imports, Crisil Ratings said in a report on Thursday.

Early-stage steel produced from iron ore is referred to as primary steel.

Net leverage, or the ratio of net debt to EBITDA, for primary steelmakers is projected to hit a five-year high of over 3x as debt levels rise more than 25% owing to ongoing capital expenditure (capex). Despite this, the credit metrics are expected to remain manageable due to relatively lower net debt per tonne compared to pre-pandemic levels and low risk associated with the predominantly brownfield capex, the report said.

"The fall in steel prices will impact the operating profitability of domestic primary steel producers. Despite an increase in sales volume and reduced cost pressures from lower coking coal prices, the operating profit margin is expected to remain at 15-16% this fiscal. Lower realisations will likely drag EBITDA down by 5-7%," said Ankit Hakhu, Director, Crisil Ratings.

Domestic steel prices, including hot-rolled coil rates, are expected to decline by an average of 10% this fiscal compared to last year's Rs 57,500 per tonne. Imports, particularly from China, where muted demand persists, are adding to the downward pressure.

"While net leverage will rise to ~3x this fiscal, interest coverage will fall below 4x. Yet, the credit metrics will be manageable and better than pre-pandemic levels because annual volume has grown more than 35% and net debt per tonne of installed capacity remains ~30% lower than before the pandemic. Also, liquidity remains healthy, reflected in cash and equivalents of ~10% of outstanding debt or ~25% of annual capex," said Ankush Tyagi, Associate Director, Crisil Ratings.

Crisil noted that while domestic demand remains robust, global steel demand is likely to contract for the third consecutive year, posing challenges for Indian steelmakers. The financial health of producers will require close monitoring, especially if steel prices fall further due to weak global demand or higher imports.

Crisil expects net leverage to improve to 2.8-3.0x next fiscal as global demand prospects brighten, domestic demand remains strong, and new capacities contribute to earnings.