As recovery in prices stays elusive and safeguard duty inadequate, steel makers from JSW to SAIL face ratings cut
Major steel companies are being downgraded en masse by rating agencies as chances of recovery in steel prices remain elusive in a sector where new capacities are being added even as existing ones remain underutilised.
This, rating agency Fitch has argued, may negate the positive impact on steel prices following the imposition of safeguard measures.
Fitch on Monday downgraded JSW Steel's long-term issuer default rating to 'BB' from BB+ with a negative outlook.
On Monday the global rating agency similarly revised downward by one notch Steel Authority of India's long-term foreign currency issuer default rating to 'BB' from 'BBB-, while Tata Steel's LTFCIDR was downgraded to BB from BB+ and placed on rating watch.
Rating agency Icra had earlier brought down JSW's long-term rating to AA- from AA Stable.
While the agencies were highlighting the deterioration in the financial profile of the steel companies, including profitability and cash accruals and increase in leverage during prolonged weakening in international steel prices, the ratings drew strength from the recent safeguard measures like minimum import prices and a 20% safeguard duty extension until March 2018.
These measures would help protect domestic manufacturers from imports even as domestic steel prices having risen by around Rs 4,000 a tonne from the January 2016 lows.
But the impact of these measures could be short-lived, Fitch cautioned on Monday.
"Prices are about 20% lower than the average for FY15, and domestic steel capacity is scheduled to jump by about 15 million tonne over the second half of FY15. Fitch's forecast assumes that further price hikes will be constrained in the near term, given the heightened competition among domestic producers to support utilisation rates," the rating agency said.
"The global steel industry is suffering from weak demand and overcapacity, and capacity utilisation is at a level last seen during the 2008-2009 global financial crisis," it said.
Add to current overcapacity situation, Tata Steel is now commissioning the first phase of 3 million tonnes a year greenfield plant at Kalinganagar where capacity would be gradually increased during FY17.
SAIL, in turn, is enhancing its crude steel capacity to 21.4 million tonne (mt) spending Rs 61550 crpore billion so far towards modernisation and expansion of the manufacturing facilities, and increasing iron ore and coal mining capacity, the rating agency said.
In addition, JSW is raising its capacity from 14.3 mt to 18 mt at all its facilities.
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