Steel sector third quarter preview: Street expects EBITDA/tonne to contract around 10-40% sequentially
The third quarter of FY22 is expected to be a humbling quarter for ferrous businesses. EBITDA per ton for most players is expected to contract by around 10-40% on a sequential basis. Lower volumes add to their woes, along with higher input costs.
The third quarter of FY22 is expected to be a humbling quarter for ferrous businesses and the street reacted to both domestic and global data points as they arrived. Now, this is evident from the fact that stock prices are up around 15-30% from 52-week highs.
The collapse of the real estate market in China, the postponement of purchases in the domestic steel market as well as the anticipation of lower steel prices are the reasons why the steel levies have been affected.
Volumes were impacted by weak sequential exports, as well as a moderate recovery in the domestic market. The decline in volumes will be the case for most of the steel majors, with the exception of JSW Steel, as they commissioned their Dolvi unit, a 5 million ton unit commissioned in the last quarter . So that’s what will contribute a bit to their volume growth.
For Tata Steel, steel exports fell on a sequential basis by around 250 basis points to around 14%.
For JSPL, the company mentioned in its press release that sales volumes were impacted by limited rake availability as well as unseasonal rains during the last quarter. Profitability will be affected due to rising raw material costs. Coking coal costs had risen so it could be hit by the cost of nearly $80-100 per ton, while mixed realizations rose only slightly, possibly between Rs 1,500 and around Rs 2,000.
Although lower iron ore prices will help some of these non-integrated players, namely JSPL as well as JSW Steel; This is because Tata as well as SAIL source their iron ore from their own backyard.
Going forward, most players’ EBITDA per ton will contract by around 10-40% on a sequential basis. Lower volumes will add to their woes, along with higher input costs.
From a valuation perspective, there will be some support coming in as debt reduction continues for most of them in the near term. On this parameter, SAIL as well as JSPL, in terms of valuation, they are cheaper than their larger counterparts. But it has been for many years.
Now, the street will be following management’s comments more than anything about the recovery in demand in domestic markets. They will also monitor the development of Chinese steel market demand after the new year. In January 2022 so far steel prices while they have risen by around 1000 rupees per ton so the sustainability of these price rises as well as future price rises should be followed by close.
NMDC has cut prices, so some of the benefits of the lower cost of iron ore will also accrue to some of these non-integrated names.