“We assume that economic activity has begun to gradually pick up from July. However, given the possibility for second or third waves of virus infections or deeper economic costs than currently factored in, downside risk to these forecasts are significant,” said Moody’s report titled Steel – Asia Pacific: Sharp profitability decline on virus-wrought demand destruction keeps outlook negative.
Indian steel-makers, Tata Steel and JSW Steel will bear the brunt of a projected 10% drop in steel consumption in the country, the first decline since the global financial crisis, the report said.
“Competitive cost of production, use of domestic iron ore that is cheaper than imported ore, and brand strength in India will help Tata Steel and JSW Steel to minimize volume decline and generate above-average profitability”.
Moody’s rated steelmakers in India include Tata Steel, JSW Steel and Vedanta’s ElectroSteel.
New export markets to open with lower realizations
As per Moody’s report, with India’s steel consumption declining, the steel-makers will seek to divert their surpluses to relatively open export destinations, such as Southeast Asia, Middle East, parts of Southern Europe and China
In the first quarter of FY21, JSW Steel JSW Steel exported nearly 53% of its total sales volume during the June quarter of FY21. JSPL’s standalone reported sales were 1.56 million tonnes out of which exports were 0.90 million tonnes. In April and May, Tata Steel ramped up exports significantly by tapping new markets. The company also said that exports will constitute around 50% of total sales volume in Q1 FY21
“However, we estimate that steel-makers’ realizations on their export sales are significantly lower than domestic realizations. The companies enjoy pricing premium in their domestic market while their exports fetch lower prices in spot markets,” said Moody’s report.
Capacity additions to take a back seat
India will remain the world’s second-largest steel producer behind China after having overtaken Japan in 2018, the report said, but new capacity additions will take a back seat with weak steel consumption hurting free-cash-flow generation in the current year.
“We expect no new capacity until the industry’s profitability as well as cash-flow stability is restored to pre-pandemic levels,” Moody’s report added.
Some steelmakers will likely increase utilization rates from 50% in April to more than 80% by the end of March 2021. Industry leaders, Tata Steel Limited and JSW Steel Limited, have already announced reduction in their capital spending to conserve cash, the report said.
Steelmakers across asia-pacific to witness fall in volumes
Sales volume will fall a mid-single digit in Korea and a mid-teen percentage in Japan. China’s demand, however, will fall marginally by a low-single-digit given government support measures for infrastructure construction, the report said. Plummeting automaker demand,and weakness in construction, infrastructure and shipbuilding will drive the decline.
Aggregate EBITDA-per-ton profitability of the Asia Pacific steel-makers will decline by a further 15% in the 12 months to March 2021, after falling 30% a year earlier.
“Three steelmakers are better positioned to withstand the pandemic-led downturn. China Baowu Steel Group Corporation , POSCO and BlueScope Steel have strong financial profiles and sizable cash buffers. These strengths, reflected in their stable outlooks,signal their stronger ability to cope with the challenges,” Moody’s report said.