Profitability of steel companies will almost double in the second half of the year

According to the report, steel producers expect better times in the second half of the current fiscal year, as lower costs and strong domestic demand will ease pressure on their margins and boost their operating margin to more than 25%.

The rating agency's report said the industry was hit by high production costs in the first quarter and is still under pressure in the second quarter.

As a result, their primary steel producers' operating margins are likely to fall to 14-16 percent in the first half of this fiscal year - well below 30 percent in last fiscal year, which was the best decade - due to high production costs, lower sales and the introduction export duty on finished steel products, among other things, Krisil added.

However, pressure on margins is expected to ease from the second half of the year due to lower production costs due to declining commodity prices and stable sales, underpinned by robust domestic demand, which will push margins above 25%, the report said.

This will have an annual operating margin at a high level of 22-24%, which will still be 700-800 basis points lower than last year, but higher than the pre-pandemic average of 20% recorded between fiscal years 2017 and 2020. .

The first quarter saw a significant decline in steel prices due to high production costs. Although factor prices have adjusted, their impact will only be felt towards the end of the second quarter, leading to lower performance in the first half.

It can be noted that global prices for coking coal - a key raw material accounting for 40% of production costs and usually imported by domestic steelmakers - from an all-time high of $600 per ton in March 2022 to $250 in August due to improved supply from Australian mines and weakening demand from global steel producers.

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

Ankit Hakhu, director of the agency, said that domestically sourced iron ore, which makes up 15-20% of production costs, has also more than halved since May 2022 due to increased domestic supplies after the government introduced a 50% export rate. duty on iron ore and 45% on pellets.

Lower commodity prices, mainly global coking coal and domestic iron ore, could lower production costs by 30% in the second half of this fiscal year, he said.
Sales also fell in the first half as the export duty, combined with moderate domestic demand, lowered domestic steel prices by almost 25% from April to Rs 57,000/t in August. Global steel prices also fell 28% as lockdowns in China weighed on global demand.
For the remainder of the fiscal year, global prices are likely to remain in a range amid the lifting of COVID-related restrictions in China and growing expectations of production cuts to meet decarbonization targets in the second half of the year.

According to Hetal Gandhi, director of the agency, domestic sales are likely to find support as domestic demand recovers to 6-8 percent, primarily on infrastructure, capital goods and cars. This, along with lower production costs, could boost operating margins to more than 25% in the second half from an estimated 14-16% in the first half.

The report is based on the five largest steelmakers - Tata Steel (including Bhushan Steel), JSW Steel, Sail, Arcelor-Mittal Nippon Steel and Jindal Steel & Power, which account for 60% of domestic production. According to the report, steelmakers expect better times in second half of the current financial year as lower costs and strong domestic demand will ease pressure on their margins and boost their operating margin to over 25%.

The rating agency's report said the industry was hit by high production costs in the first quarter and is still under pressure in the second quarter.

As a result, their primary steel producers' operating margins are likely to fall to 14-16 percent in the first half of this fiscal year - well below 30 percent in last fiscal year, which was the best decade - due to high production costs, lower sales and the introduction export duty on finished steel products, among other things, Krisil added.

However, pressure on margins is expected to ease from the second half of the year due to lower production costs due to declining commodity prices and stable sales, underpinned by robust domestic demand, which will push margins above 25%, the report said.

This will have an annual operation