Rising input cost to put pressure on steel companies’ profit margin

BL Mumbai Bureau | Updated on: Mar 07, 2022

Demand revival: Many steel companies have revived their capex cycle to improve their profitability | Photo Credit: Niteenrk

Coking coal prices zoom three times so far this fiscal

Imposition of sanctions on Russia is set push up input cost of steel companies for some time till raw material trade flows re-adjust.

Being the fifth largest global coal producer, Russia accounted for 10 per cent and 17 per cent of the international trade in metallurgical and thermal coal last year.

Since the start of FY2022, international coal prices have already rallied quite sharply, with spot prices of premium hard coking coal (FoB Australia basis) and high-grade thermal coal (FoB South Africa) increasing by three times and 125 per cent, said ICRA in a report.

Elevated coal costs have started to nibble at the margins of listed steelmakers in December quarter, as earnings trended downwards compared to September quarter.

Supply disruptions

In addition, Russia is the third largest global producer of nickel, a key raw material used in stainless steel production and along with Ukraine, Russia is also a leading global exporter of iron ore pellets. Supply disruptions of these key steelmaking raw materials would lead to heightened input cost pressures for Indian steel companies.

Jayanta Roy, Senior Vice-President & Group Head, ICRA said after reporting a steep 70 per cent sequential increase in cost of coking coal last quarter, a further increase of 15 per cent is expected in March quarter.

Though iron ore prices have moderated and domestic mills have announced some steel price hikes in January, these will not be able to entirely compensate for the steep rise in coking coal costs, he added.

The ongoing conflict in Eastern Europe could further exert input cost pressures on domestic steel mills, which makes us believe that the gross spreads for a primary steel producer to be lower by about 15 per cent sequentially in the current quarter, and the industry’s fourth quarter earnings would be lower than Q3 FY'22 level.

More exports possibilities

However, reduced market access for Russian steel mills could help Indian steel producers increase footprint in Europe and the West Asia, where the C.I.S countries cumulatively exports around 22-23 million tonnes of steel annually.

Indian mills could also vie to have a greater footprint in the US, where Russia is a key supplier, and where the presence of Indian steel companies is fairly limited so far.

However, extent of export would be limited by the already high capacity utilisation levels of leading steel companies in India, said Roy.

Published on March 07, 2022
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