Major steel players may shelve capex plans: CRISIL

In the near-term, steel manufacturers are expected to focus on managing liquidity, alongside augmenting sales volume and liquidating inventory through domestic sales or exports.

With the steel demand expected to decline by 13-15 per cent during this fiscal, major industry players have decided to either delay or altogether shelve their capex plans, rating agency CRISIL said.

According to a survey by the ratings agency, weak financial health and gloomy demand are expected to weigh on capex plans, with major industry players delaying their capex plans for more than a year.

The demand for steel in the first quarter of the fiscal is expected to fall by 60-65 per cent as the extended lockdown to contain COVID-19 pandemic and the migration of labour have impacted construction and manufacturing sectors.

"Steel manufacturers are focussing on managing liquidity and cash flows in the near term to tide over an estimated contraction of 60-65 per cent demand in the first quarter of fiscal 2021. While some may delay their capex plans, some envisage shelving of the plans altogether," the agency said.

In the near-term, steel manufacturers are expected to focus on managing liquidity, alongside augmenting sales volume and liquidating inventory through domestic sales or exports, it added.

The agency further said that even though the demand recovery is expected in the third quarter, it is expected to decline by 13-15 per cent for the fiscal.

"The prospects of the construction sector, which accounts for over 65 per cent of steel demand in India, have dimmed considerably with the onset of the pandemic.

"Most of the infrastructure projects will be deferred even after the lockdown is lifted mainly on the back of labour shortage due to reverse migration, and lower infrastructure spending due to funding constraints of central and state governments on account of lower tax collections and focus on social sectors," it said.

At the same time, no major support in demand is envisaged from other sectors, including capital goods, with weak industrial production, and continued slowdown in automobiles sector due to cautious discretionary spending, the agency noted.

"While the demand for long steel is expected to recover faster once construction activities resume, the industry is pessimistic about demand growth in flat steel," CRISIL said.

The study further noted that there will be limited correction in steel prices, especially of HR coils, this fiscal.

"That is because last fiscal had seen a substantial dip, and having incurred high costs due to low steel prices and a weak economy, the producers have limited scope to reduce prices further. In addition, fixed costs will hurt margins given the operating de-leverage due to lower utilisations," it said.

CRISIL further added that weak realisations and a slump in sales volume due to the extended lockdown and subdued demand are expected to contract margins by 200-250 basis points on average.