Indian steelmakers’ performance is likely to be hampered in the first fiscal quarter through June by slowing domestic steel consumption growth and elevated coking coal prices, according to Indian credit rating agency ICRA.

India is the second-largest crude steel producing country in the world. During the first four months of 2019 crude steel otuput surpassed 36.1 million tonnes, up a mere 0.2% y-o-y.

Steel consumption growth slowed to 7.5% y-o-y in the fiscal year through March 2019 (FY2019) from 7.9% the previous year due to liquidity and fuel price-related headwinds faced by the automotive sector. In April 2019 growth moderated further to 6.4%. It is likely to remain lower this year on account of continued weakness in the automotive sector and reduced construction-related activities.

“However, the construction sector would be at the forefront of the demand recovery in the second half of FY2020 on the back of an expected boost to the infrastructure sector,” ICRA says in a report. The Indian government budget for FY2020 will be presented in July and will provide guidance towards state spending in the sector, it adds.

Spot prices of seaborne premium hard coking coal, which accounts for 40-45% of steelmaking cost for a domestic blast furnace operator, have remained above $200/tonne. They have been supported by a 10.1% growth in Chinese crude steel output in January-April. Indian domestic hot rolled coil prices weakened from INR 41,250/t in the March quarter to INR 40,500/t ($585) in the current quarter. This means that elevated coking coal prices are likely to maintain pressure on BF mills’ profitability.