Fitch Ratings said that infrastructure spending proposals in Budget 2016-17 are unlikely to provide a boost to domestic steel demand unless and until project execution rates pick up significantly.
However Fitch said that, "We expect steel demand growth to improve slightly to 7-8% in 2016-17, supported by a pick-up in government infrastructure spending with better project execution."
The main reason is overcapacity. The overcapacity is likely to weigh on their profitability and credit metrics in the near term. Domestic capacity is scheduled to jump by about 15 million tons (mt) over the second half of 2015-16 and 2016-17, which will exceed a potential 6 mt increase in domestic steel demand in the next fiscal.
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. However, after the Budget, manufacturers expressed their happiness as they anticipated the steel business would expand.
The rating agency has predicted that steel demand growth in India has remained soft at 4.7% year-on-year (y-o-y) during April-December, 2015-16. This is because the balance sheets of many companies showed that private-sector investment has also remained weak.
It was noticed that in the previous fiscal, 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 % y-o-y in H1 FY16), project implementation appears to have been weak so far in 2015-16.
In the meantime global supply continues to outstrip demand. Given the supply-demand growth mismatch, producers are likely to engage in price competition amid weak utilisation levels. Hence Fitch concluded that a recovery in sales realisation and profitability for Indian steelmakers is unlikely before fiscal 2017-18.