Icra lowers steel price forecasts for FY24 as Chinese exports weigh on market

New Delhi: Steel prices have been on a decline since the beginning of FY2024, with domestic hot rolled coil (HRC) prices plummeting 3.8% in the current quarter due to falling Chinese exports, rating agency Icra said in a report on Thursday.

Icra has revised its baseline steel price predictions for FY2024, forecasting an average year-on-year decrease of 4-5% in domestic HRC prices, a stark contrast to the previously projected marginal year-on-year increase of 1-2%.

“Domestic steel demand has demonstrated resilience by growing 7.2% in April 2023, aligning with ICRA’s full-year growth projection of 7-8%. However, the likelihood of a substantial price recovery in the near future appears slim amidst external headwinds. As a result, ICRA has revised its baseline steel price forecasts for FY2024, anticipating an average year-on-year decrease of 4-5% in domestic HRC prices, in contrast to the previously expected marginal year-on-year rise of 1-2%, ” the agency said.

Jayanta Roy, senior vice-president & group head of corporate sector ratings at Icra, noted that despite 2023 starting positively for the steel industry, bolstered by the reopening of the Chinese economy and the subsequent potential for recovery in steel demand, the present dynamics suggest a more challenging landscape.

However, the initial surge in demand seems to have lost momentum, resulting in a surplus in the domestic market. Consequently, Chinese HRC export offers have plummeted by 21% in FY2024, reaching $550/MT at present, while Chinese monthly steel exports soared to an almost two-year high of nearly 8 million tonnes in April 2023.

ICRA’s analysis indicates that domestic HRC prices are currently trading at a premium of $ 50/MT compared to Chinese imports. Although Japanese HRC export offers are higher at $ 615/MT (in contrast to $ 550/MT for Chinese offers), domestic HRC prices are trading at a premium of $25/MT over Japanese imports due to their duty-free access to the Indian market. This situation raises the possibility of a greater-than-expected surge in steel imports in FY2024, as trade flows divert to high-growth markets such as India.

Consequently, unless the domestic premium significantly decreases from its current highs, steel imports to India could increase by as much as 30-40% year-on-year in FY2024, potentially making India a net steel importer after a five-year interval.

While steelmakers face challenges in the market, they may find relief through the moderation of input costs in FY2024. Seaborne prime hard coking coal offers from Australia, which constitute around 40% of the overall steelmaking cost for blast furnace operators, are projected to average between US$ 255-260/MT in FY2024, a 20-25% decrease from FY2023 levels, owing to improved supplies from Australia.

Thermal coal prices have also shown moderation, with domestic e-auction premiums from Coal India falling to 137% in April 2023 (compared to an average of 265% in FY2023), and RB1 grade imported thermal coal spot prices currently trading at US$ 111/MT, substantially lower than the FY2023 average of US$ 253/MT.

Furthermore, a correction in domestic iron ore prices is expected, with a projected 5-6% year-on-year decrease in FY2024 amid softening seaborne iron ore prices. These factors are anticipated to partially mitigate the impact of steel price corrections observed thus far in the current fiscal year, thereby helping to maintain industry operating profit margins at levels similar to FY2023.

Roy emphasized the industry’s resilience, stating, “While these subdued margin levels were last witnessed during the downcycle years of FY2017, what has given the industry more resilience to withstand further downturns is the aggressive deleveraging during the last upcycle of FY2021/FY2022. This has brought down the industry’s bank borrowings to US$ 178/MT of installed capacity in March 2023, representing a decline of 52% from March 2017 when it stood significantly higher at US$ 371/MT.”

Despite upcoming capacities amounting to approximately 36 million tonnes per annum, the government’s capital expenditure drive and efforts to stimulate domestic steel consumption are expected to maintain the industry’s capacity utilization rate at around 80% in FY2024.

However, as earnings moderate from the peak observed in FY2022, the industry may increasingly rely on external financing to meet committed expansion plans. Early signs of this trend can be observed in the steel industry’s bank borrowings, which increased by 22% during FY2023.

Consequently, the industry’s leverage (total debt to operating profits) is projected to worsen, estimated at 2.5-3.0 times in FY2023E/FY2024P compared to 1.1 times in FY2022. Nevertheless, with the industry’s average EBITDA per metric ton expected to range from approximately $100-150 per MT in FY2024, Icra maintains a ’stable’ outlook for the sector.