Sanctions against Russia for invading Ukraine will push up input cost pressures on Indian steel mills until the raw material trade flow readjusts, but will lead to greater export opportunities, rating agency ICRA said in a steel sector report on Tuesday, March 8.
ICRA noted that, being the fifth-largest coal producer globally, Russia accounted for 10 percent and 17 percent of international trade in metallurgical and thermal coals respectively in the calendar year 2020.
Elevated coal costs have started to nibble at the margins of listed steelmakers from the third quarter of 2021-22 as earnings trended downwards from the high watermark of the second quarter, ICRA said.
After a steep 65-70 percent sequential increase in the cost of coking coal in the third quarter of the fiscal year 2021-22, a further increase of 15 percent is expected in the fourth quarter. Though the price of iron ore has moderated somewhat from the highs of the third quarter, and domestic mills have announced some steel price hikes from late January 2022, these will not be able to entirely compensate for the steep rise in coking coal costs, ICRA said.
“The ongoing conflict in eastern Europe could further exert input cost pressures on domestic steel mills, which makes us believe that the gross spreads for a primary steel producer, which is dependent on market purchase of raw material, will be sequentially lower by around 15 percent in the current quarter, and the industry’s fourth quarter earnings will be lower than the level in the third quarter of the fiscal year 2020-21. Nevertheless, in absolute terms, the industry’s earnings are expected to remain at healthy levels in the next 12 months, leading us to maintain a positive outlook for the sector," the ICRA report said.
Apart from supplying several steelmaking raw materials, Russia and Ukraine are the fifth and 12th largest steelmakers in the world respectively, cumulatively accounting for around 10 percent of the global steel trade. Around 45 percent of the steel production from Russia and around 75 percent from Ukraine are exported to other nations. This could lead to regional steel supply shortages as Russian mills brace for sanctions and Ukrainian steel production becomes severely disrupted by the conflict. Therefore, in the export markets, leading Indian steel companies can expect to see some market share gains if they can increase their capacity utilization levels, the rating agency report said.
