After two successive years of rush in earnings, steel companies are now staring at a notable decline over the next one year as the industry faces multiple headwinds emerging from trade barriers export duty on finished steel, unfamiliar 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 featured by high inflation and front loading of policy rate hikes, said ratings agency ICRA, in a note. While the domestic steel demand is expected to remain unchanged at 8%, the overall operating profit of the industry in this fiscal has been revised downwards by about 30% due to lower steel prices and elevated input costs.
The steady rise in coking coal costs had started to pick over 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.
While the margin pressure is likely to continue in the seasonally weak second quarter when steel prices would remain under pressure, the correction in coking coal spot prices by 27% in the last three weeks augers well for steelmakers’ second half margins when demand conditions improve, said, Jayanta Roy, Senior Vice President, ICRA.
India’s completed steel exports are expected to decrease by 25% year-on-year this fiscal year, 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.