Increase in proposed infrastructure spending is unlikely to provide a boost to demand for steel unless project execution rates pick up significantly, according to Fitch Ratings.
The Fitch report said domestic steel producers also face overcapacity which is likely to weigh on their profitability and credit metrics in the near-term.
The budget plans to increase capex on infrastructure (roads, railways and shipping) in the financial year ending March 2017 by 23 per cent to Rs.2.3 lakh crore. For FY16, the government had budgeted for infrastructure investment to double from actual spending from the previous financial year. However, except for a pick-up in road construction (up 36 per cent year-on-year in in the first half of the current financial year), project implementation appears to have been weak so far in FY16, according to the ratings agency.
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 in the first nine months of the fiscal year ending March 2016.
“We expect steel demand growth to improve slightly to 7-8 per cent in FY17, supported by a pick-up in government infrastructure spending with better project execution,” according to the report.
However, the steel industry is burdened by overcapacity. Domestic capacity is scheduled to jump by about 15 million tonnes over the second half of the current fiscal year and stretching over next financial year. At the same time, global supply continues to outstrip demand.
Source: The Hindu