Indian steel capacity utilisation will decline on the back of 12-14 million tonnes/year of capacity addition by fiscal-year-2016-end, coupled with no significant hike in consumption, according to credit rating agency Ind-Ra. This will put pressure on finished product prices unless more products are levied with a safeguard duty.

The stress in the industry is seen mainly a result of both domestic and international overcapacity, a slower-than-expected pickup in demand and the consequent fall in steel prices. “Ind-Ra believes that a significant revival of domestic demand and firming up of the international steel prices are not possible in the short term,” the agency says in a report sent to Kallanish.

The fall in iron ore prices has benefited steel producers without captive mines, but those with mines have had to face the additional burden of an increase in royalty rate to 15% from 10%. Lower coking coal prices have benefited all blast furnace-based steelmakers. “However, here also, the depreciation of the Indian rupee has offset some of the advantages given that the country imports 80-90% of its coking coal requirements,” the agency continues.

Indian BF mills are seeking to improve productivity and efficiency, while producing more value-added products. Some estimates say technological improvements could reduce energy consumption by -35% and hike BF productivity by 40%.

“However, the shift of product portfolio to higher value-added products and increase in operational efficiencies are likely to happen gradually, and their benefits are uncertain,” Ind-Ra observes. “This is because a majority of players will be following these strategies. This may therefore not provide a competitive advantage.”

Steelmakers’ credit metrics are seen remaining stressed in the near term – a significant increase in capacity utilisation and profitability would be required for them to return to fiscal-year-2011 levels. Ind-Ra estimates ebitda/tonne has to increase by 60-70% by fiscal year 2017 to allow the leverage profile of large steel producers to return to the 2011 levels.