Steel companies expect market to stay stable in 2022

Steel demand in 2022 is expected to remain buoyant after hitting an all-time high in 2021 despite price pressure. With economic activity gradually picking up, domestic steel demand registered a sharp recovery last year.

Prices also increased sharply on the back of high input costs of materials such as coking coal and iron ore.

Dampened by rain

Although the industry remains hopeful, steel demand, which started slowing down during the monsoon in the September quarter, has not recovered fully due to unseasonal rain hampering infrastructure activities in key consumption States.

Moreover, the steel demand from the automobile sector is yet to bounce back to the pre-Covid level even as other steel-consuming sectors such as white goods, packaging and real estate are limping back to normalcy.

Supported by the government’s infrastructure push, the domestic finished steel consumption is estimated to grow 16 per cent in 2021, albeit on a low base and expected to halve in 2022 depending on the impact of Omicron and subsequent restriction to be imposed by the government.

With the rising input cost and falling selling price, profitability of steel companies is expected to come under pressure. However, the reduction in overall debt will lead to lower interest outgo and cushion the drop in margins to an extent.

Profits up

Steel companies had managed to register a rise in September quarter net profit despite a sequential moderation in steel spreads due to cost pressures, largely supported by higher sales following the recovery in economic activity post the second wave.

Input cost pressures for domestic mills may moderate somewhat towards the later part of March quarter, as seaborne coking coal prices have declined 20 per cent from the high of mid-November, the benefit of which would slowly get reflected in mill margins after a lag of 2-3 months.

VR Sharma, Managing Director, Jindal Steel and Power, said steel prices are expected to remain stable with downward bias till the March quarter and from there it will depend on sustainability of domestic demand.

Australian coking prices are expected to fall from the current $340-350 a tonne to below $300 and the benefit of it will creep into India by April, he added.

MSMEs feel the pinch

The sharp rise in steel price has crushed the small-scale user industries forcing them to reach the government for help. Steel prices have gone up to ₹70,000-75,000 per tonne from ₹ 35,000-40,000 over the past year and pushed up the working capital requirement of MSMEs by almost 70 per cent. Following the complaint by MSMEs, the government has directed steel companies to reduce prices for small companies.

Also read: Steel demand to bounce back on govt incentives, robust economy: Seshagiri Rao, JSW Steel

“Our concerns are with MSMEs which have been sandwiched between original equipment manufacturers and steel producers even while steel companies are ready to extend a helping hand,” he said.

Large OEM (original equipment manufacturers) companies such as Maruti Suzuki, M&M, Hyundai and Larson & Turbo which get their work done by MSMEs should revise contracted price as soon as they get the request so that there is no working capital strain on contractors. Any delay in revision of prices even for a month will wipe-out many small industries as they do not have the withholding power, he added.

Exports outlook

With the domestic demand expected to hold the fort in 2022, steel exports are expected to moderate.

Seshagiri Rao, Joint Managing Director, JSW Steel, said exports have moderated to pre-Covid levels with revival of domestic demand. Government spending still remains the major driver even as there is some traction in private sector spending in select sectors. It is a matter of few months before the private sector takes over, he said.

Ritabrata Ghosh, Assistant Vice-President, ICRA, said steel prices surged to all-time high in 2021, helping mills report a surge in earnings and thereby an accelerated pace of deleveraging.

China led the first leg of the recovery in global steel markets during 2020 and the early part of 2021. However, going forward, the sustenance of the upcycle in the second leg would hinge on the healthy demand momentum continuing outside of China, he said.

While international steel prices in 2022 are poised to settle at lower levels compared to 2021, the industry’s absolute profitability metrics are still expected to remain at healthy levels in the next 12 months, he added.

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