Steel companies to witness a blockbuster Q33 min read . Updated: 02 Dec 2020, 09:47 AM IST
- Domestic steel firms raised prices of the metal four times in October and November, but have managed to keep them lower or, in some cases, on a par with the landed cost of imported steel as global prices strengthen
MUMBAI: Large steel companies are set to deliver a blockbuster performance in the third quarter of this fiscal as rising steel prices, low input costs and recovering domestic demand drive their margins to multi-year highs. With the monsoon season over and a visible pick-up in economic activity across the board, industry analysts expect steel companies to stage a comeback in the second half of the year.
"Indian steel spreads have risen by about 25% in Q3FY21 and are at a three-year high," as per a report by brokerage firm Motilal Oswal. “We expect spreads to stay strong on the back of a domestic demand recovery and higher regional prices. The improvement in EBITDA/tonne (earnings before interest, tax, depreciation and amortization) should be even higher on an improving sales mix, lower exports and higher value-added sales."
Domestic steel firms raised prices of the metal four times in October and November, but have managed to keep them lower or, in some cases, on a par with the landed cost of imported steel as global prices strengthen.
For instance, the price of hot rolled coil, a key flat steel product, rose roughly 10% in November to ₹47,000 per tonne while prices of rebars, a measure of the price movement in long steel products, rose 13% to ₹44,000 per tonne. As global rates have continued to tick higher on the back of Chinese appetite for the metal, analysts predict that steel producers will be able to continue to raise prices in December as well.
"The third quarter will be a blockbuster quarter for the steel industry," Amit Dixit, assistant vice-president – research, Edelweiss Securities, told Mint. “We are going to see record high margins. Spot prices for steel have moved up and companies have been able to renew their supply contracts, particularly to the automotive sector, at a premium. Tata Steel, for instance, has said its realizations per tonne will rise by ₹5000 this quarter. Compared to the Ebitda/tonne of about ₹12,000 in Q2, ₹17,000 realisation per tonne will be among the highest that it has reported."
While iron ore prices remain high, the cost of coking coal--a key input in the blast furnaces that large steel players operate to manufacture crude steel--has come down. Import prices plunged to a 52-month low by mid-November, declining 27% since early-October in anticipation of a global glut in the medium term with the reported verbal notice of a ban on Australian coal imports by China.
A revival in demand has helped absorb the impact of recent price hikes.
"Hot rolled coil prices have shot up globally, and steel prices are strong in India and Europe; so we’re in a sweet spot just now," TV Narendran, CEO and MD, Tata Steel, had told Mint last month while discussing the company’s second quarter results.
Narendran said demand revival has been broad-based, beginning with rural economy and then spreading to passenger and commercial vehicles and now, the construction sector. "There’s demand from supply chain managers (for building warehouses), we’re seeing growth in oil and gas segment, water infrastructure, renewable energy. Steel is used in practically every sector."
Seshagiri Rao, joint MD and group CFO, JSW Steel, told Mint that he was very bullish on the steel sector. "In flat steel, demand is more than supply today, particularly of hot rolled coil...With long products, there was some volatility in the first two quarters because of covid and then seasonal factors. I think that will reverse in Q3 and Q4."