The increased infrastructure spending in the budget 2016-17 is unlikely to provide a boost to domestic steel demand growth, Fitch Ratings said today.
However, the ratings agency said in a statement that demand can grow if “project execution rates pick up significantly”.
Domestic steel producers also face over-capacity, which is likely to weigh on their profitability and credit metrics in the near term, it added.
The government has allocated a total outlay of Rs 2.21 lakh crore in the Budget for 2016-17 to boost infrastructure in the country.
“For 2015-16 fiscal, the government had budgeted for infrastructure investment to double from actual spending in 2014-15. However, except for a pick-up in road construction (up 36 per cent Y-o-Y in H1 FY’16), project implementation appears to have been weak so far in 2015-16,” Fitch Ratings said.
Private-sector investment has also remained weak, given the stretched corporate balance sheets. As a result, steel demand growth in India has remained soft at 4.7 per cent year -on-year (Y-o-Y) during April-December this fiscal, it added.
“We expect steel demand growth to improve slightly to 7-8 per cent in 2016-17, supported by a pick-up in government infrastructure spending with better project execution,” it said.
However, the steel industry is burdened by overcapacity. Domestic capacity is scheduled to jump by about 15 million tonnes over the second half of 2015-16 and 2016-17 period, which will exceed a potential 6 million tonne increase in domestic steel demand in the next fiscal.
At the same time, the global supply continues to outstrip demand. Given the supply-demand growth mismatch, producers are likely to engage in price competition amid weak utilisation levels.
“Therefore, a recovery in sales realisation and profitability for Indian steelmakers is unlikely before fiscal 2017-18,” Fitch Ratings added.