India Ratings and Research (Ind-Ra) revised its outlook on the steel sector to stable for FY22 from negative.
The agency expects FY22 steel volumes to improve year-on-year and compensate for a likely moderation in per tonne margins as steel prices gradually moderate from high levels witnessed over 2H FY21. Both demand and supply are likely to be strong and recover from the slowdown in FY20 and the Covid-19 led demand and supply disruptions in FY21.
However, spreads are likely to moderate over FY22 as steel prices face headwinds with limited correction in raw material prices. Ind-Ra said it expects domestic iron ore prices to gradually correct in FY22 as iron ore supply improves, although remaining elevated till domestic iron ore output increases to FY20 levels.
Once Odisha iron ore mines ramp-up, the lessees of auctioned mines are likely to try and pass on high premiums to customers, thus providing a further fillip to prices.
FY22 coking coal prices are likely to be higher than FY21 levels but unlikely to be at pre-Covid-19 levels. However, prices can remain volatile for certain months because of the concentrated nature of the cooking coal mining sector and risk of a natural calamity in Australia.
Ind-Ra said long products demand growth is likely to be sharp in FY22 supported by a demand push from government-led infrastructure investments in affordable housing, railways, rural electrification and road networks besides a lower base of FY21.
Besides, the government allowing secondary producers to supply rebars for infrastructure projects will improve sector competitiveness and pricing.
Similarly, said Ind-Ra, demand for flat products is likely to grow sharply in FY22 due to lower base effect of FY21 because of Covid-19 in addition to government infrastructure investments and recovering auto demand.
Ind-Ra said it expects rating outlook of most entities to be stable in FY22 compared to largely negative over 2H FY20 and FY21. The strong recovery in sector fundamentals over 2H FY21 has ensured a faster-than-expected sale rebound post-Covid-19 disruptions.
Accordingly, the leverage, cash flow and liquidity of steel players are likely to improve in FY22, said Ind-Ra.