After two successive years of surge in earnings, steel companies are now staring at a significant decline over the next one year as the industry faces multiple headwinds emanating from trade barriers — export duty on finished steel, unprecedented coal/energy cost pressures and muted domestic demand growth so far.
The operating environment will become far less attractive in the coming months and challenges would be accentuated by high inflation and front-loading of policy rate hikes, said ratings agency ICRA, in a note.
Fall in operating profit
While the domestic steel demand is expected to remain unchanged at 8 per cent, the overall operating profit of the industry in this fiscal has been revised downwards by about 30 per cent due to lower steel prices and elevated input costs. Consequently, ICRA has revised the sector’s outlook to stable from positive, it said.
Jayanta Roy, Senior Vice-President, ICRA, said the steady rise in coking coal costs had started to nibble at the margins of steelmakers even before the export duty was announced. The consolidated per tonne operating profit of the top four steelmakers has already fallen to about $110 from $326 a tonne logged in the June quarter of FY22.
With domestic hot-rolled coil (HRC) prices correcting by about 9 per cent since the imposition of the export duty and coking coal consumption costs poised to spike by about 30-35 per cent quarter-on-quarter, the industry’s operating profits are expected decline by $80-90 a tonne in the coming quarter despite the fall in iron prices.
While the margin pressure is likely to persist in the seasonally weak second quarter when steel prices would remain under pressure, the correction in coking coal spot prices by 27 per cent in the last three weeks augers well for steelmakers’ second half margins when demand conditions improve, said Roy.
India’s finished steel exports are expected to decrease by 25 per cent year-on-year this fiscal, with the decline likely to be more pronounced in highly competitive markets such as South East Asia and the Middle East compared to Europe, where export offers typically are higher.
June 16, 2022