High input costs to affect steel cos’ profits in Dec quarter

Our Bureau | | Updated on: Dec 06, 2021
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Pressure likely to moderate towards end of March quarter as seaborne coking coal prices have declined

Steel companies' profit will come under pressure in the December quarter as input cost has seen a sharp spike doubled with the downtrend in selling prices from the September quarter. Spot coking coal prices, too, have skyrocketed to record levels in the last few months.

However, despite a sequential moderation in steel spreads in the September quarter, the domestic steel industry was able to record another all-time high quarterly profit, largely supported by higher deliveries following the recovery in economic activity post the second wave.

Input cost pressures for domestic mills could moderate towards the end of March quarter, as seaborne coking coal prices have already declined by 20 per cent since the mid-November highs. Its benefit will slowly get reflected in the margins of these companies after a lag of two to three months.

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Jayanta Roy, senior vice-president at ICRA, said consumption cost of coking coal is expected to increase by about 65 to 70 per cent sequentially in the third quarter. Though iron ore prices have been coming down, it will not be able to entirely compensate for the steep rise in coking coal costs.

On the realisation front, taking a cue from the fall in Chinese export offers, domestic steel prices have dipped in the last fortnight. Gross spread of steel makers will be sequentially lower by about 10 per cent in the current quarter and the industry’s third quarter earnings would be lower than the high-watermark achieved in September, said Roy.

Positive signs

The post-monsoon demand recovery in India has been showing positive signs, with the monthly finished steel consumption in October reaching a seven-month high of 8.8 million tonne and representing a sequential uptick of around seven per cent over the previous month.

However, if the rapid spread of the Omicron variant leads to an unanticipated disruption in economic activity in key steel-producing hubs, then the industry could see an accelerated process of mean-reversion of spreads in FY23.

The domestic steel sector’s consolidated borrowing per tonne of installed capacity stood at $176 tonne in September, shrinking by almost half from $350 a tonne logged in November 2008, when the last steel super cycle ended following the global financial crisis. This suggests that domestic steel companies are now significantly less leveraged than in FY09.

Published on December 06, 2021

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