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Renewed US-China Trade Tussle to Impact Steel Fundamentals

On the domestic front, the Indian steel sector is likely to see robust demand from the affordable housing and infrastructure sectors, bolstered by various government schemes and projects. However, demand from the automobile sector is likely to be muted.

Renewed US-China Trade Tussle to Impact Steel Fundamentals

The renewed US-China trade friction is likely to impact steel sector fundamentals, going forward. At least that’s what India Ratings and Research (Fitch Group) feels. India Ratings and Research (Fitch Group) has published the first monthly edition of its credit news digest on India’s steel sector for July 2019. The report highlights the demand-supply scenario, price trends, imports/exports in both India and China, encompassing finished steel products (both flat and long), scrap, iron ore, coking coal etc., while also looking at the impact of end-user industries on India’s steel sector. The report further covers Ind-Ra’s recent rating actions.

 

The last few months have witnessed a renewed trade dispute between the US and China. With the existing friction in global trade, the Chinese government would need to provide further economic support to the country’s domestic industries, as it had done in the recent past, including the undertaking of targeted stimulus efforts to give a boost to the Chinese infrastructure and construction sectors.


On the domestic front, the Indian steel sector is likely to see robust demand from the affordable housing and infrastructure sectors, bolstered by various government schemes and projects. However, demand from the automobile sector is likely to be muted.


A key area to watch out for is the auction of mines by March 2020. Any material delay in the due process could lead to disruption in domestic steel production in FY21. Iron ore prices rose 48 percent YoY to USD135/MT (CNF India – Fe 64 percent) in July 2019, largely because Brazil-based Vale SA, a global leader in iron ore and nickel production, cut its production on account of the collapse of a dam in January 2019. However, in July 2019, Brazilian supply showed signs of recovery, and this revival shall further be fuelled by the recent news on Vale resuming operations at the closed mines. Furthermore, considering the depreciation of Chinese currency on account of the imposition of new tariffs by the US, and with mills reluctant to increase iron ore inventories owing to the muted demand scenario, Ind-Ra expects iron ore prices to showcase a bearish trend in the coming months.


India Ratings and Research expects the supply of coking coal to be tight in the coming months, with large Australian miners reducing their output. However, India, the largest coking coal importer from Australia, has been maintaining its monthly import levels. Over the near-to-medium term, the agency expects coking coal prices to remain elevated, though there would be a slight moderation.


Overall, the fundamentals for the steel sector are likely to weaken in FY20, with the risk of softening of prices, elevated raw material prices and weak demand. However, the impact of these factors would be partly off-set by favourable demand-supply balance for industry participants.



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