There is a moderate risk of global trade war with a domino effect, leading to reactive measures by other countries. About 10% of the India’s surplus capacity caters to the export markets, primarily Europe and neighboring countries. However, the impact could percolate through negative sentiments in the international markets and oversupply due to diversion of supply by countries exporting to the US to other importing countries, opines India Ratings and Research (Ind-Ra).
Ind-Ra expects margins of the domestic players will not be under material threat in the near term. While potential correction in input prices and China’s supply discipline will benefit the margins, an unexpected deceleration in Chinese demand growth and increased intensity of global trade war could counter the margin improvement.
China’s capacity cut of 100mt-115mt over 2016-2017 has led to a shift of new production volumes to the central region that is rich in coal resources, although away from ports from north eastern regions which are high on pollution. The capacity addition is primarily in the electric arc furnace production method, which is more efficient than the blast furnace process. The agency believes that the shifting of capacities to South Central China is unlikely to impact the cost structure of exporters.
Ind-Ra expects further deleveraging of balance sheet of steel companies in FY19 backed by sustained margins coupled with absence of funding of loss by debt. At the same time, resolution of stress companies will lead to debt reduction due to haircut by lenders as well as expected improvement in margin on change of management. However, debt-led capacity expansion over and above the inorganic expansion will result in steady leverage for a few large players.