Ratings agency ICRA on Wednesday raised its Financial Year 2023-24 (FY24) forecast for domestic steel demand to 9-10 per cent on the back of government capital expenditure (capex). The agency, at the start of the current fiscal, had estimated demand at 7-8 per cent.
Domestic steel demand would have a compound annual growth rate (CAGR) of 10.5-11 per cent between FY22 and FY24, it said. The last time the industry had such sustained high growth was before the 2008 global financial crisis. At that time strong private sector capex enabled a CAGR of 12.7 per cent between FY2006 and FY2008.
Between April and August of FY24, domestic steel demand grew at 13.1 per cent, powered by the government’s infrastructure spending. Central government capex grew 59.1 per cent year-on-year (YoY) in Q1 FY24, suggesting an accelerated pace of infrastructure spending ahead of the 2024 elections, according to ICRA’s research note on the steel sector.
In sync with demand, steel companies are increasing capacity. Around 14.3 million tonne (mt) of new steelmaking capacity is expected to come on-stream in FY24, according to ICRA.
It would be the largest capacity addition made by the industry in a single year in the recent past, said Jayanta Roy, senior vice-president & group head, Corporate Sector Ratings, ICRA. “The industry’s supply pipeline is expected to remain strong in FY2025 as well, when an estimated 12.3 mtpa of capacities are lined up for commissioning.”
“Despite this burst of new supplies, we believe that the favourable domestic demand will adequately absorb these upcoming capacities, helping improve the industry’s capacity utilisation rate to 82 per cent in FY2024 from 80 per cent in FY2023,” said Roy.
Even as domestic demand is expected to be strong, there are headwinds abroad.
These include a meltdown of the Chinese housing market, a key engine driving the country’s steel demand, ICRA said. Also, the prospect of "subpar economic growth in western economies" looms large. As a result, trade flows were diverted to high-growth markets like India.
ICRA said domestic hot-rolled coil (HRC) prices are currently trading at a premium of $40-45 per tonne over prevailing Chinese FOB spot export offers, lined up to reach Indian shores after a lag of two months.
Therefore, domestic steel prices are likely to remain under check in the coming quarters even though the demand outlook is favourable. Domestic HRC prices corrected 8 per cent in Q1 FY24.
However, input cost pressures were expected to alleviate. Therefore, ICRA expected the industry’s absolute operating profits to sequentially increase by 20-30 per cent in Q2 FY24.