Why steelmakers can look forward to some good news after recent bloodbath

steel

Indian Market
by 5paisa Research Team Last Updated: 2022-09-06T14:11:39+05:30

Indian steelmakers saw an abnormal push to their margins last year supported by a strong rise in steel prices. The new financial year started on a bad note with the sharp rise in raw material prices putting pressure, but things are likely to get better for the sector in the coming quarters.

The operating margin of domestic primary steelmakers is estimated to have halved in the first half of this fiscal year, April-September, compared with a decadal high around 30% for the whole of last fiscal year, due to high input costs, lower realizations and imposition of export duty on finished steel products, among other reasons.

In the second half of this fiscal year, however, margin pressure is expected to ease — led by lower production cost due to declining raw material prices and steady realizations backed by robust domestic demand — lifting it above 25%.

As a result, operating margin is expected to be at 22-24% for the full fiscal year, much higher than the pre-pandemic average of around 20% logged between FY17 and FY20.

The first quarter of the fiscal year ended June 30 witnessed a significant decline in steel prices due to high input costs. Though input prices have since corrected, its impact will be felt only towards the end of the second quarter, leading to a subdued first half when the results are declared next month.

Global prices of coking coal, a key raw material that comprises around 40% of the production cost and is usually imported by domestic steel manufacturers, have plummeted from a historical high of around $600 per tonne in March to around $250 in August due to better supply from Australian mines and weakening demand from global steel producers.

Iron ore, sourced domestically and accounting for close to a fifth of the production cost, has also halved in price since May 2022 on account of increased domestic supply due to imposition of export duty. The lower raw material prices, mainly global coking coal and domestic iron ore, may reduce production cost for domestic steelmakers by close to a third in the second half this fiscal year.

On the flip side, realizations have also fallen in the first half as export duty, coupled with a moderation in domestic demand, pulled down domestic steel prices nearly 25% since April to Rs 57,000 per tonne in August.

For the rest of the fiscal year, global prices are likely to remain rangebound, amid a lifting of Covid restrictions by China and growing expectations of lower production curbs to meet decarbonisation goals in the second half, according to rating and research agency CRISIL.

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