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Silver lining: Falling costs benefit steel makers

Photo: Bloomberg
Photo: Bloomberg

Summary

In Q1FY24, margins of steel companies are likely to contract sequentially, given the high-cost inventory of coking coal.

Steel makers saw some respite in the March quarter (Q4FY23) with volumes and domestic prices rising sequentially. Seasonality had a role to play here as Q4 is usually the strongest quarter. Also, the margin performance improved across most companies.

The average domestic hot rolled coil (HRC) price increased by over 6% sequentially in Q4 to 59,228 per tonne, according to SteelMint. This led to an improvement in realization per tonne. Data from Motilal Oswal Financial Services shows that the average of consolidated realization per tonne of steel companies under its coverage rose by 2,290 sequentially in Q4. These companies are Jindal Steel & Power Ltd, JSW Steel Ltd, Tata Steel Ltd and Steel Authority of India Ltd.

Graphic: Mint
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Graphic: Mint

However, in Q1FY24, margins of steel companies are likely to contract sequentially, given the high-cost inventory of coking coal. True, coking coal spot prices are trending lower, but the gains would reflect in the financials with a lag. In Q1 so far, average prices of coking coal are at $244 per tonne and nearly 29% lower than Q4, according to CoalMint. Thus, a good share of the benefit from lower coking coal prices would flow through from Q2 onwards.

Iron ore, another key input, has also seen a reduction in price. State-owned iron ore producer NMDC cut prices of lumps and fines by 7-11% from 29 May.

Indeed, there are levers for expansion in steel companies’ margin, but the demand environment continues to remain sombre. In Q1 so far, the average domestic HRC price is 2.4% lower than Q4. “As per our channel checks, traders are waiting for price announcements by the major mills in June 2023 and are expecting a cut of 1,500-2,000 per tonne for HRC and rebar prices, and slightly more for cold rolled coil/coated products," said analysts at ICICI Securities in a report on 3 June.

Moreover, Q1 is a seasonally weak quarter. Tata Steel in its Q4 earnings call said it expects volume in Q1 to be lower sequentially, impacted by shutdowns. However, for FY24, the company sees its volume rise by 1.5 million tonnes from almost 29 million tonnes in FY23.

Another concern is that the domestic steel price is at a premium to import prices, which means there is further downside risk.

“Imported steel prices from Vietnam and Japan are working out to be cheaper than domestic prices. For instance, Vietnam July 2023 HRC landed price delivery is currently quoted at a discount of 5,000 per tonne, compared to domestic prices," said analysts at Motilal Oswal in a report on 5 June.

To be sure, a pick-up in global steel prices is necessary to provide a boost to domestic HRC prices. This, to a great extent, depends on the rebound in the Chinese economy, a key market for metals. Demand uptick in China has remained elusive despite strong credit indicators, notes ICICI Securities.

There is a silver lining, though. “Given that China has environmental restrictions, production cap would mean production of steel would be at par or lower this year versus the last. This could mean exports from China would dip in 2HCY23 thus resulting in favourable demand supply dynamics, which may augur well for domestic steel price," said Satyadeep Jain, an analyst at Ambit Capital. Having said that, one needs to monitor global demand closely, he added.

Shares of key steel companies—Tata Steel, JSW Steel, Jindal Steel & Power, and Steel Authority of India Ltd—are down by 8-16% from their respective 52-week highs. While it is crucial for demand to bounce back, margin trajectory also requires tracking.

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