Operating margin of primary steelmakers in India likely to increase by 500 basis points: CRISIL

Sharp increase in prices of steel will lift operating margin of primary steel manufacturers by 500 basis points (bps) to 32-33% year-on-year this fiscal, according to rating agency CRISIL. “While this will drive steelmakers to double down on capital expenditure, robust accruals will help them continue deleveraging and strengthening of balance sheets, leading to a positive credit outlook,” according to a CRISIL study of the top five steelmakers– accounting for 58% of domestic production last fiscal.

Global steel prices, rallying from last year’s lows, were up 2.1 times on year in June, reaching the highs last seen in 2008. While some easing is likely over the rest of 2021, prices may still average $750-800 per tonne, still up 60% on-year.

Domestic steel prices, which are significantly driven by the landed cost of imports, have rallied, too, though at a slower pace. More recently, the price gap between domestic hot-rolled coil steel and landed cost of imports has widened sharply to more than 20%, given weaker domestic demand amid the second wave of the pandemic. This provides headroom to domestic steel mills even if global steel prices ease from current levels.

Further, while domestic iron ore prices are expected to double year-on-year, the impact on primary steelmakers will only be partial. Besides, prices of seaborne coking coal, the other key input, remain fairly subdued as China is yet to lift its ban on imports from Australia due to geopolitical tensions.

Given the robust profitability, and the fact that steel mills are already operating at close to 90% utilization, steelmakers have already doubled their planned capex for fiscals 2022-24 compared with the previous three fiscals. As much as 27 million tonne capacity, accounting for almost 20% of domestic capacity, is expected to get added by fiscal 2025.

This sizable increase in capacities raises the risk of supply exceeding demand over the medium term in an inherently capital-intensive and cyclical sector, which saw a slew of debt defaults and bankruptcies in the previous down-cycle, CRISIL warns.

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