'Steel-makers margins to nearly double in H2 to 25% from H1 levels'

Mumbai: Steel-makers are in for better times from the second half of the current fiscal as lower input cost and robust domestic demand will ease their margin pressure and lift operating margins to over 25 per cent, as per a report.

The industry was hit by high input costs in the first quarter and is still under pressure in the ongoing second quarter, the rating agency said in the report.

As a result, their operating margins of primary steelmakers are likely to fall to 14-16 per cent in the first half of this fiscal — massively down from 30 per cent last fiscal, which was a decadal best — due to high input costs, lower realisations and imposition of export duty on finished steel products, among other reasons, Crisil added.

However, from the second half onwards the margin pressure is expected to ease due to lower production costs because of declining raw material prices and steady realisations backed by robust domestic demand, lifting it above 25 per cent, the report said.

This will have the full-year operating margin at a robust 22-24 per cent, which will still be 700-800 bps lower from the last year, but higher than the pre-pandemic average of 20 per cent logged between fiscals 2017 and 2020.

The first quarter saw a significant decline in steel prices with high input costs. Though input prices have corrected, their impact will be felt only towards the end of the second quarter, leading to a subdued first half.

It can be noted that global coking coal — a key raw material that comprises 40 per cent of the production cost and is usually imported by domestic steel manufacturers — has seen the price plummet from a historical high of $600 a tonne in March 2022 to $250 in August due to improved supply from Australian mines and weakening demand from global steel producers.

The coking coal price is expected to remain benign as supply improves and the global demand outlook remains weak, the agency said.

Ankit Hakhu, a director at the agency, said iron ore, sourced domestically and accounting for 15-20 per cent of the production cost, has also more than halved since May 2022 due to increased domestic supply after the government imposed a 50 per cent export duty on iron ore and 45 per cent on pellets.

Lower raw material prices, mainly global coking coal and domestic iron ore, may lower production costs by 30 per cent in the second half of this fiscal, he said.

Realisations have also fallen in the first half as export duty, coupled with a moderation in domestic demand, pulled down domestic steel prices by nearly 25 per cent since April to Rs 57,000 a tonne in August. Global steel prices also dropped 28 per cent as lockdowns in China impacted global demand.

For the remainder of the fiscal, global prices are likely to remain range-bound, amid a lifting of COVID restrictions in China and growing expectations of lower production curbs to meet decarbonisation goals in the second half.

According to Hetal Gandhi, a director at the agency, domestic realisations are likely to find support from a revival in domestic demand to 6-8 per cent, led by infrastructure, capital goods and automotive. This, along with lower production cost, can lift operating margin to over 25 per cent in H2 from an estimated 14-16 per cent in H1.

The report is based on the top five steelmakers — Tata Steel (including Bhushan Steel), JSW Steel, Sail, Arcelor-Mittal Nippon Steel and Jindal Steel & Power — which account for 60 per cent of domestic


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