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PTI Last Updated at 06 Aug 2018, 19:08 IST India

Stressed steel asset acquisitions

by large operating companies will lead to an increase in the

sector consolidation, particularly flat steel market, a

report said.

This should improve the bargaining power of the

domestic players with reduced chances of undercutting by

stressed companies to operate plants, India Ratings said in

its report here.

Flat products are primarily used in auto and other

consumer goods segments.

The National Company Law Tribunal (NCLT) in May this

year approved Tata Steel's resolution plan for debt ridden

Bhushan Steel under the Insolvency and Bankruptcy Code

(IBC). The NCLT also gave its approval to the also consortium

of JSW Steel and AION Investments Private II Ltd to acquire

cash-strapped Monnet Ispat and Energy last month.

Ind-Ra expects further deleveraging of balance sheet

of steel companies in FY19 backed by sustained margins coupled

with absence of funding of loss by debt.

At the same time, resolution of stressed companies

will lead to debt reduction due to haircut by lenders as well

as expected improvement in margin on change of management

could reduce the sector leverage.

However, debt-led capacity expansion over and above

the inorganic expansion will result in a steady leverage for a

few large players, it said.

The agency expects margins of the domestic players to

not be under material threat in the near-term. While potential

correction in input prices and China's supply discipline will

benefit the margins, an unexpected deceleration in Chinese

demand growth and increased intensity of global trade wars

could hamper the margins.

Ind-Ra said that the EBITDA margins for majority of

the steel companies will remain at similar levels in FY19,

while improve for a few others. The improvement will largely

be for companies who completed capex over FY17-FY18 and are

likely to ramp up utilisation in FY19 on back of strong

demand, leading to better operating efficiency and absorption

of fixed cost.

Margins of few companies could be impacted by a lag in

passing on the severe volatility in coking coal prices in

FY18, which may even out in FY19, it added.

The agency pointed out that the coking coal prices may

taper down while global iron ore prices may not witness

relatively significant correction.

Ind-Ra expects the coking coal shortage premium to

recede and prices for Australian hard coking coal to taper

down to an average of USD170/tonne in FY19 as against

USD189/tonne in Q218 driven by improving infrastructure in

Australia and new mine supplies during 2018-2019.

However, it believes global iron ore prices may not

witness relatively significant correction than coking

coal prices supported by strong ex-China global steel demand

in FY19. The agency estimates FY19 average iron ore price to

hover at around USD 65/tonne.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

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