Tata Steel, JSW Steel's profitability to decline: Moody's
Slowing but still healthy domestic demand and limited capacity additions will help keep steel prices largely stable over the next 12-18 months, said Moody's.
Tata Steel's earning before interest taxes depreciation and amortization (EBITDA) per tonne in its Indian operations will likely decrease in the 12 months to June 2020. However, at more than $200 per tonne, its profitability will continue to be the highest among rated Asian steel producers.
JSW Steel's EBITDA per tonne will decline by around 13% and remain lower than Tata Steel's Indian operations, largely because of elevated raw material prices and the company's relatively limited backward integration, the report said.
"Nonetheless, the two Indian steel companies will benefit from rising steel production on the back of continued demand growth," it added.
Licenses to 59 iron ore mines currently under operation in India will expire by March 2020. While most of these licenses are expected to be renewed, if they are not, a resulting shortage in iron ore supply would lead to an increase in prices, the report said. "Tata Steel's Indian operations are insulated from such iron ore supply disruptions because of its backward integration into iron ore production. However, JSW's captive sourcing will account for only 20%-25% of its iron ore requirements by December 2019 and therefore the company is more exposed to a rise in iron ore price," Moody's said.
India will remain the world's second-largest steel producer behind China after having overtaken Japan in 2018. New capacity additions in India will be limited over the next 12 months but domestic production will increase to meet demand growth. Consolidation in the Indian steel sector that began in 2018 will continue in 2019, with five stressed steel companies accounting for 20% of the country's steel-producing capacity operating under new ownership.
"This will lead to an improvement in India's capacity utilization to 85% over the next two years from less than 78% in the 12 months to June 2019," Moody's pointed out. Slowing but still healthy domestic demand and limited capacity additions will help keep steel prices largely stable over the next 12-18 months, it added.