Higher input costs and softening steel prices will sequentially impact the profitability of Indian steel companies from the third quarter (October-December) of the fiscal year 2021-22, rating and research agency ICRA said in its latest steel sector report on Tuesday, January 11.
The report said that industry earnings are expected to trend downwards from the current quarter with higher input costs, especially coking coal costs, creeping into the profits and losses of steel companies. Furthermore, domestic steel prices have started to soften from the second-quarter highs, which will also adversely impact the industry’s profitability.
Nonetheless, the industry’s absolute profitability metrics will still remain at a healthy level within the next 12 months, leading the rating agency to maintain a “positive” outlook for the sector, the report said.
“Our calculations suggest that the consumption cost of coking coal is expected to increase by around 65-70 percent sequentially in the third quarter. Though the price of iron ore has been coming down, it will not be able to fully compensate for the rise in coking coal costs. On the realization front, taking cue from the correction in Chinese export offers, domestic steel prices have witnessed a correction in the last fortnight. We, therefore, believe that the gross spreads for a primary producer which is dependent on market purchases of raw material will be sequentially lower by 10 percent in the current quarter and the industry’s third quarter earnings will be lower than the high levels achieved in the second quarter of the current fiscal year,” the ICRA report said.