After two consecutive years of robust growth, Indian steel companies are staring at a significant decline in earnings over the next 12 months as the industry faces multiple headwinds from the export duty on finished steel, unprecedented coal and energy cost pressures, and muted domestic demand, Indian rating agency ICRA said in an industry report on Friday, June 17.
The rating agency has revised its outlook for the Indian steel industry to ‘stable’ from ‘positive.’ It said that the Indian steel sector could be on the way to an accelerated reversal as the operating environment becomes far less attractive in the coming months.
Such challenges will be accentuated by high inflation and the front-loading of policy rate hikes. Consequently, in ICRA’s base-case scenario, while the domestic steel demand growth forecast for the fiscal year 2022-23 has been kept unchanged at a healthy seven to eight percent, the domestic steel industry’s overall operating profits for the current fiscal year has been revised downwards by around 30 percent compared to the previous estimate made before the Russia-Ukraine conflict, as margins become squeezed between lower steel prices and elevated input costs.
“With domestic hot rolled coil prices correcting by around nine percent since the imposition of the export duty, and with coking coal consumption costs poised to spike by around 30-35 percent quarter on quarter, notwithstanding the correction in domestic iron ore prices, the industry’s operating profits are expected to sequentially decline by $80-90/mt in the first quarter of 2022-23,” the rating agency said.
“While the margin pressure is likely to persist in the seasonally-weak second quarter when steel prices will remain under pressure, the correction in coking coal spot prices by about 27 percent in the last three weeks augurs well for steelmakers’ second-half margins when demand conditions improve," ICRA said.
The government’s recent announcement of 15 percent export duty on various finished steel products covers over 95 percent of India’s finished steel exports, and therefore makes exports a much less attractive proposition now as mills evaluate the economics of a higher duty, ICRA said.
Consequently, India’s finished steel exports are expected to decrease by 25 percent year on year by the end of the current fiscal year, with the decline likely to be more pronounced in highly competitive markets like Southeast Asia and the Middle East compared to Europe, where export offers typically are higher. However, with semis being kept out of the ambit of the duties, export of semis is likely to witness a significant increase of 40 percent year on year in the current fiscal year, as other finished steel categories suffer the impact of the large export duty, ICRA stated.