De-leveraging at an accelerated pace amid indications that the current high profitability cycle will prevail for a considerable period, Indian steelmakers are likely to embark on a new capex cycle soon.
According to Morgan Stanley, the focus of the steelmakers would initially be on repairing their balance sheets and as a result, the net debt-equity is likely to improve and fall below one at an aggregate level in FY21 and 0.5 in FY23 from around 1.4 in FY20.
As inventory is at a 33-month low now through capacity utilisation rate of the large mills was already over 80% in February, the second half of 2021-22 fiscal might see companies first accelerating or advancing existing capex programmes, followed by potential small brownfield expansion. The large greenfield expansion programmes might not happen soon though but are definitely on the cards.
JSW Steel’s joint managing director and Group CFO M V S Seshagiri Rao said the company might reach its targeted 45 million tonnes per annum (mtpa) production capacity “well ahead” of the earlier guidance of 2030-31 as a result of acceleration in demand both in India and globally.
Not just domestic demand, steel firms’ ambitions are soaring high on a better price, huge export potential (as China pruning production to meet its carbon neutrality goal by 2060), benign raw material costs and above all, government support – be it in the form of Production Linked Incentive (PLI) scheme or the new mining policy that does away with a clutch of cumbersome laws and various others.
JSPL’s managing director said, “It seems the steel sector will pay back loans faster. This will make banks comfortable and they will do financial closure for new projects. When the return on investment (ROI) increases, new projects come.”
However, he said that banks might change their outlook on the steel sector as Indian needs more steel and this would be possible with new capex budgets.
Though India is the second-largest steel producer in the world after China, the gap in production between the two countries is a whopping 953 million tonnes (MT). Compared with China’s 1,053 MT production, India’s production was only 99.6 MT in 2020, according to World Steel Association.
After an initial sharp drop in consumption and production during April-June 2020, there has been a smart recovery in the steel sector. Continuous increase in steel consumption and demand after gradual unlocking of the economy, increasing cost of iron ore, higher export and higher international prices of steel have led to an increase in retail prices and with that their margins.
Indian steel sector’s tight inventory situation is expected to prevail for some time now. A tight supply situation will imply domestic steel remain close to importing parity prices, which is currently at a discount of 10-11%, Morgan Stanley said.
“We expect peak profitability in the current cycle to be much higher than in the previous one. Steel prices are strong but input prices (especially coking coal) are benign, supporting our outlook for an even higher spread than in the last cycle,” it said.
Credit: Financial Express