Steel-makers profitability to see limited impact even as prices remain on a downtrend – ET Infra

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The profitability of primary steel companies is expected to be insulated from the falling prices of the alloy as key input costs are going down too, experts said.

Prices of benchmark hot-rolled coils of steel have declined by over 6% from their peak in April to around Rs 56,000 a tonne. The prices are 10% lower from the levels a year ago.

Meanwhile, coking coal prices are at their lowest monthly average since September 2021 at around $200 per tonne. The prices are nearly half compared to same period a year ago.

“If you see the fall in spreads vis-à-vis the fall in prices, it is only marginal for this quarter. Next quarter, it could be flattish as well,” said Aditya Welekar, who tracks metals at Axis Securities. He sees spreads declining by around 6% sequentially in the June quarter.

Spreads or gross margins for steel-makers is generally the difference between the selling price of the product and the cost of raw materials. The spread for HRCs in India is currently over 32,000 rupees per tonne, compared to about 37,000 rupees both in April and May.

While lower selling prices generally impact the operating profit made by companies on each tonne of steel sold, a sharp decline in coking coal costs over the recent months has helped limit it, given that coking coal accounts for as much as 40% of the production cost. The production of one tonne of steel consumes about 0.6-0.8 tonne of coking coal.

“It is noteworthy that HRC prices are down 10.5% YoY though spot spread is up 10.7% YoY mainly due to lower coking coal prices,” ICICI Securities said in a note.

Steelmakers generally maintain about two months of inventory for coking coal and the benefit of the recent sharp fall in coking coal prices is expected to come in from late this quarter, analysts said. Companies, though, have been able to marginally reduce their costs even in the March quarter because of the lower costs of blended coking coal.

“Coking coal has been moderating quite materially, and we expect that on the margin front, there could be some improvement as compared to the last year, because last year was a wash-out year,” said Manish Gupta, senior director at CRISIL Ratings. He expects margins for 2023-24 (Apr-Mar) to improve by 100-200 basis points on year to around 17-19%.

PRICES AND THE CHINA IMPACT
China, which accounts for more than half of the global production of steel, is also the largest consumer for the alloy. Subdued local demand in the country because of tepid offtake from the housing and construction segments, though, has seen the country up its exports over the last few months.

China has exported 8.36 million tonne of steel in May, the highest in any single month since September 2016. Its exports between January to May this year, meanwhile, have surged by more than 40% to more than 36 million tonne.

Steel prices in China are also at multi-month lows, and the combination of weak global prices and higher imports coming in at lower prices is keeping steel prices in India subdued.

  • Published On Jun 16, 2023 at 07:52 AM IST

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