Fitch report bullish on Indian steel

The Indian steel sector is expected to witness increased investor interest in the wake of steady balance sheet correction, says the internat...

The Indian steel sector is expected to witness increased investor interest in the wake of steady balance sheet correction, says the international rating agency, Fitch Ratings.

Deteriorating balance sheets have been affecting investment decisions of many investors over the past few years, which are expected to change dramatically now.

The Fitch report highlights the improving performance of the industry during the last one and a half years despite the global industry facing one of the most challenging operating and business environments.

Confronted with issues stemming from the US such as section 201 trade sanctions, there were fears that such measures would disrupt supply channels and hurt exports to all regions thereby reducing sales volumes and creating overcapacity in the local markets.

However, world prices for steel products such as hot and rolled steel shot up, as some of the other countries imposed their own protective import restrictions to curb a surge of lower priced steel imports.

Strong demand from alternative markets, particularly China, helped absorb some of the additional global capacity on account of lower exports to the US, benefiting most steel producers worldwide through better pricing and higher capacity utilisation.

However, operating margins of secondary manufacturers were under pressure due to increasing raw material prices of iron ore and coal. But with higher capacity utilisation, most Indian producers reported substantially higher cash flows with improvements in interest coverage and debt protection indicators.

Story continues below this ad

The international steel prices are now likely to be driven by factors, including continued growth in steel consumption by China, the pace of economic recovery in the US and Europe, continuation of the much needed consolidation among steel producers .

In the long term, there is potential for further structural change in the global steel sector which could transform it to one that is demand driven.

The outlook on the Indian sector is primarily driven by the global steel sector. However, considering the 7 per cent GDP growth estimated during the current and next year, Fitch expects the Indian steel sector to fare better than its counterparts in other countries. This is based on assumptions regarding growth of the construction and infrastructure sectors.