Input costs, election, Chinese imports to weigh on steelmakers' Q4 margins

Major steelmakers are likely to take a hit in the March quarter due to a slowdown in domestic demand ahead of elections, and falling steel prices on account of aggressive competition from Chinese manufacturers, experts said.

Coupled with higher coking coal prices – a key input for primary steelmaking – the margins of steelmakers during the quarter are expected to dip sequentially and year-on-year, despite higher volumes.

However, the worst may be over for the sector with steel imports declining, coking coal prices moderating, steel prices inching upwards in April and domestic demand outlook post the general elections remaining bright, the experts said.

The only concern that remains is a fall in Chinese steel prices seen in recent weeks, which could drag down international steel prices and in turn domestic prices in India, they added.

The price of benchmark hot-rolled coils of steel declined from an average of ₹55,078 per tonne in December to ₹52,750 per tonne on average in March, declining over the quarter, as per data from market intelligence & consulting firm BigMint.

Meanwhile, coking coal prices during the quarter were higher on average by 7% compared to the preceding quarter, data from Icra showed.

This is expected to drag the per tonne earnings before interest, tax, depreciation and amortisation (Ebitda) of top steelmakers Tata Steel and JSW Steel by 15% and 29%, as per brokerage firm Nuvama.

The profits of these companies are expected to dip between 35 and 60% year-on-year during the March quarter, according to a report by Motilal Oswal.

“Q4 will be weaker than Q3 for primary steelmakers given the softening steel prices during the quarter even as coking coal prices remained range-bound at an elevated level,” said Jayanta Roy, senior vice president, Icra.

“Coking coal prices have moderated 20-25% in April and the benefits of this will accrue from June onwards. Steel prices have also started increasing slightly in April. Domestic demand should also look up following elections. So Q1 (FY25) should be a better quarter,” he said.

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While global demand for steel remains muted, its consumption in India has been relatively robust, helping domestic steelmakers post better volumes.

However, steel prices in the domestic market are closely linked to global prices. This is because a large delta in domestic and international prices would prompt dealers to increase imports to benefit from lower prices.

Thus, prices in the domestic market have remained muted in line with international steel prices even as consumption has been growing.

Going forward, muted steel consumption in China with little signs of revival in the country’s real estate sector could be a concern for domestic steelmakers. In the absence of robust domestic consumption, Chinese steelmakers could again increase exports at aggressive prices, dragging down global steel prices.

“In Q3, Chinese steel prices went up. But Chinese prices have been decreasing in the last 20 days, so that brings uncertainty. As far domestic demand is concerned, the worst is not over in China,” said Icra’s Roy.

China accounts for around half of the world’s steel production capacity. Thus, the country has an outsized bearing on the global steel industry.