Strong demand, falling iron ore prices to benefit smaller manufacturers H2 FY22, says Icra
2 min read . Updated: 20 Aug 2021, 12:09 PM IST
Premium- With prices of sponge iron, scrap and non-coking coal rising significantly, margins of smaller players took a hit. Moreover, in FY21, smaller firms were also hit by iron ore shortage, which the larger integrated companies were insulated from to an extent because of their captive sources
MUMBAI: Manufacturers of long steel products may witness in revival of fortunes in coming quarters driven by increased construction activity, according to Icra.
In particular, small and medium product manufacturers, those using sponge iron-Electric Arc Furnace (EAF)/Induction Furnace (IF), who suffered more than their larger peers, those using Blast Furnace-Basic Oxygen Furnace (BF- BoF) route, will benefit from this strong demand uptick.
While larger manufacturers were able to resort to exports to cushion the impact of pandemic-induced demand slump over the past 14-16 months, smaller players were left struggling. The ratings agency expects the rise in demand, driven by the government’s thrust on infrastructure development, particularly in rural centres, apart from a pick-up in local, small-ticket construction activities, to lead to increased offtake from smaller manufacturers.
“Over the past six years, given the multitude of policy and social/health disruptions, long steel demand grew at an anaemic 6-year CAGR (FY2016-2021) of 1.4%. So far, available demand has been largely absorbed by the larger long steel manufacturers leading to a significantly divergent capacity utilisation trends between them and smaller long-steel manufacturers. We expect this to correct to an extent in the coming months as demand increases, pulling up capacity utilisation rates of small and medium sized manufactures, since larger players have been operating at healthy rates anyway," said Jayanta Roy, senior vice president and group head, Icra.
Unlike past cycles, when steel prices and coking coal prices moved in tandem, the trade turmoil between China--the largest importer--and Australia--the largest exporter--have led to decoupling of prices of the two commodities since the second half of FY21.
Consequently, the steep rally in steel prices and benign coking coal prices led to a sharp increase in margins of larger players to all-time highs in FY21 and Q1 of FY22, improving their credit profiles significantly.
On the other hand, with prices of sponge iron, scrap and non-coking coal rising significantly, margins of smaller players took a hit. Moreover, in FY21, smaller firms were also hit by iron ore shortage, which the larger integrated companies were insulated from to an extent because of their captive sources.
During the past few weeks, domestic iron ore prices have been correcting amid a decline in international prices and better availability in the domestic market. Since June 2021, international coking coal prices have almost doubled on increased ex-China demand.
While large integrated steel manufacturers’ margins will continue to remain insulated from iron ore price movement to the extent of their captive availability, the impact of higher coking coal prices will show up in the margins in H2 FY22, with a lag of about two months for imported coking coal.
Icra expects the recent fall in iron ore prices in the country and sharp increase in coking coal prices, along with an improvement in capacity utilisation of smaller firms, to lead to a narrowing of margin gap between these two segments going forward.
