Fitch Ratings, in a just published Special Report, said that it expects the 2010 outlook for the Indian steel sector to be stable in reflection of the improving domestic demand scenario despite global overcapacity, and an industry wide improvement in overall liquidity situation.
Fitch however cautions that a large part of demand improvement is driven by the fiscal stimulus of the Indian government and the timing of phase out of the stimuli packages and that replacement with private demand would be a critical determinant of the growth rates for 2010.
Fitch noted that with inflationary pressures likely to spread to the general economy, government policies on tackling inflation through a reduction in import duties could also have a potential impact on the fortunes of the industry in 2010. Fitch notes that though steel prices in India during Q4 of 2009 were higher than international prices driven, to a large extent, by the improving demand scenario in the region and by the existence of import duties it feels that the trend will correct itself over 2010, and for domestic prices to largely mirror international prices, notwithstanding the difference on account of import duties.
Fitch believes that the 2010 benchmark iron ore price settlement will be in the range of 15% to 20% higher than the current benchmark of USD 54 per tonne FOB contract price settled by Vale SA, or the USD 62 per tonne FOB contract price settled by Rio Tinto plc in 2009.
Fitch also expects benchmark hard coking coal contracts to be settled about 30% to 50% higher for the 12 month period ending March 2010, given currency movements as well as tight supply. This may result, to a certain extent, in an adjustment in profitability, but is still likely to remain at a relatively comfortable level.
Fitch also believes that, with the kind of capacity expansion projects in the pipeline, there is the potential risk of long term over capacity, which could put prices under pressure. However, the agency notes that delays on the back of regulatory approval for land and mine allocations and the potential to export from a low cost base could act as potential mitigants.
The Outlook Report gives an overview on the following
The world wide Steel Sector
Fitch Ratings expects demand for steel to recover from low levels at a modest pace over the next 12 to 18 months, but not to reach peak levels in the medium term. Pricing should be constrained by excess capacity, but raw material cost increases are expected to be passed through.
India's position in the global context
Despite facing severe demand pressure during Q408 and Q109, the domestic steel industry has recovered faster than its global peers. Fitch also notes that while many steel majors postponed or delayed their expansion plans in 2009, these plans could be reinitiated in 2010 though most of the spend may actually occur beyond end 2010.
Profitability
Fitch believes that profitability could adjust to a certain extent, but should still remain relatively comfortable.
Regulatory changes
The government prevented steel prices from rising in line with international prices during April to May 2008, by removing import duties on steel and threatening companies with a complete ban on exports. Another key event for the industry would be when the government starts withdrawing its stimulus packages, and how quickly private demand could compensate for this
The agency expects demand to exceed that of 2009, but uncertainty remains regarding the rate of growth.