ICRA upgrades steel demand outlook despite capacity addition

Rating agency ICRA has revised the domestic steel demand outlook for this fiscal to 9-10 per cent, from the 7-8 per cent forecast at the start of the fiscal, on the back of strong government capital expenditure.

Domestic steel demand is poised to grow at a double-digit compound annual growth rate of 10.5-11 per cent during FY2022-24. The last time the industry witnessed such sustained high growth was before the 2008 global financial crisis, when strong private sector capex fuelled domestic steel demand at a CAGR of 12.7 per cent during FY2006-08.

Powered by the government’s infrastructure-oriented growth model, domestic steel demand has been growing in double digits since FY2022, and this momentum continued in the current fiscal as well, when demand registered a growth of 13 per cent between April and August of this fiscal. The Central Government capex registered an impressive 59.1 per cent year-on-year growth in Q1 FY24, which suggests an accelerated pace of infrastructure spending ahead of the 2024 elections.

Steady supply

Jayanta Roy, Senior Vice-President, Corporate Sector Ratings, ICRA, said that about 14.3 million tonnes per annum of new steelmaking capacity is expected in the current fiscal, making it the largest addition by the industry in a single year.

The industry’s supply pipeline is expected to remain strong in FY2025 as well, when an estimated 12.3 mtpa is lined up for commissioning. Despite this burst of new supplies, the favourable domestic demand will adequately absorb them, helping improve the industry’s capacity utilisation to 82 per cent this fiscal from 80 per cent in FY23, he said.

Headwinds

However, the industry faces multiple headwinds in the external environment, including a meltdown of the Chinese housing market, a key engine driving the country’s steel demand, and the prospect of subpar economic growth in western economies.

While exports remained weak, steel imports began to rise as global steel trade flows were diverted to high-growth markets like India. ICRA’s analysis suggests that domestic hot-rolled coil (HRC) prices are currently trading at a premium of $40-45 a tonne over prevailing Chinese FoB spot export offers. Therefore, domestic steel prices are likely to remain under check in the coming quarters even though the demand outlook is favourable.