Steel cos’ profit to come under pressure in June quarter

Steel companies’ profit to come under pressure in the June quarter due to lower demand and higher cost of operations.

Domestic steel demand eased to 7.5 per cent last fiscal from 7.9 per cent logged in FY18 due to liquidity and fuel price concern in the auto sector and it moderated further to 6.4 per cent in April. Demand is likely to remain lower in June quarter due to continued weakness in the auto sector and reduced construction related activities during the general election period.

This apart, higher coking coal prices is likely to affect the financial performance of domestic steel- makers, said rating agency ICRA. Spot price of seaborne premium hard coking coal, which accounts for 40-45 per cent of the steel-making cost for domestic steel companies, has remained above $200 a tonne due to strong demand in China.

Given that domestic steel hot rolled coil prices have weakened sequentially from ₹41,250 a tonne in March quarter to ₹40,500 in June quarter, higher coking coal prices are likely to keep the profitability of domestic companies under pressure, said ICRA.

Jayanta Roy, Group Head, Corporate Sector Ratings, ICRA, said gross margin of domestic steel companies has fallen by about ₹3,000 a tonne in March quarter and it will come down further by ₹400-500 a tonne in June quarter due to high coking coal prices and pressure on steel prices.

However, he added steel companies have benefited from glut in iron ore supply due to significant ramp-up in mining activities in Odisha, where a large number of iron ore mine leases would expire next March. This has helped partly insulate domestic ore prices from the steep rally in seaborne prices following the supply disruptions from Brazilian miner Vale, he said.

On the contrary, secondary steel producers benefited from fall in the thermal coal prices. Coal India’s spot e-auction premiums declined to 69 per cent in April against 92 per cent in same period preceding year.

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