Steelmakers’ margins to nearly double in H2 to 25% from H1 levels: report
Steelmakers expect better times from the second half of the current fiscal year as lower input costs and strong domestic demand ease pressure on margins and drive operating margins to more than 25%, according to one report.
The industry was hit by high input costs in the first quarter and is still under pressure in the second quarter, the rating agency said in the report.
As a result, their primary steelmakers operating margins are expected to fall to 14-16% in the first half of this fiscal year – down sharply from 30% in the previous fiscal year, which was the best of the decade – due to high input costs, declining realizations and the imposition of export duties on finished steel products, among other reasons, Crisil added.
However, from the second half of the year, the pressure on margins should ease due to lower production costs due to lower raw material prices and steady realizations supported by robust domestic demand, bringing it to above 25%, according to the report.
This will have a full year operating margin at a solid 22-24%, which will still be 700-800 basis points lower than last year, but above the pre-pandemic average of 20% recorded between fiscal years 2017 and 2020. .
The first quarter saw a significant drop in steel prices with high input costs. Although input prices have corrected, their impact will not be felt until the end of the second quarter, resulting in a lackluster first half.
It can be noted that global coking coal – a key raw material which accounts for 40% of the cost of production and is typically imported by domestic steelmakers – has seen its price drop from an all-time high of US$600 per tonne in March 2022 to USD 250 in August due to improved supply from Australian mines and weaker demand from global steel producers.
The price of coking coal is expected to remain favorable as supply improves and the outlook for global demand remains weak, the agency said.
Ankit Hakhu, director of the agency, said iron ore, which is domestically sourced and accounts for 15-20% of the cost of production, has also more than halved since May 2022 due to rising l domestic supply after the government imposed a 50 percent export duty on iron ore and 45 percent on pellets.
Lower commodity prices, mainly global coking coal and domestic iron ore, could cut production costs by 30% in the second half of this fiscal year, he said.
Achievements also fell in the first half as export duties, coupled with moderating domestic demand, pushed domestic steel prices down nearly 25% since April to Rs 57,000 per ton in August. . Global steel prices also fell 28% as lockdowns in China impacted global demand.
For the remainder of the fiscal year, global prices are expected to remain range-bound, amid the lifting of COVID restrictions in China and rising expectations for production cuts to meet decarbonization targets in the second half.
According to Hetal Gandhi, director of the agency, the national achievements should find support in a recovery of domestic demand at 6-8%, driven by infrastructure, capital goods and automobiles. This, combined with lower production costs, can bring the operating margin to more than 25% in H2, against an estimated 14-16% in H1.
The report is based on the top five steelmakers – Tata Steel (including Bhushan Steel), JSW Steel, Sail, Arcelor-Mittal Nippon Steel and Jindal Steel & Power – which account for 60% of national production.