Bright outlook for steel makers over fears of Ukraine war-led supply crunch

High input costs amidst supply disruptions, and adverse change in output/demand in key markets like China are downside risks

The Ukraine war has caused fears of supply disruptions in industrial metals where Ukraine and Russia are both big players. Although raw material costs will escalate, demand for ferrous and non-ferrous metals is likely to exceed supply, and push up prices. This trend is evident on international commodity exchanges, and producers have hiked prices.

Russia exports iron ore, high grade coal and nickel, all key to steel production. It was the fourth largest steel producer in the world with 73.4 million tonnes per annum (MTPA) (2020) and Russia was also the third largest nickel producer (250,000 tonnes) in the world. Ukraine is also a steel producer and exporter. Taken together they accounted for about 45 MPTA out of global exports of roughly 420 MTPA. The EU was the major importer of Russian and Ukrainian steel and this is a definite opportunity for Tata Steel.

As a result of that capacity being removed, the Indian steel industry, which reported good results in Q3, 2021-22 may see the bull cycle continuing because both domestic realisation and exports prospects are good. Prices of various categories of steel products have risen by between 3 per cent and 11 per cent in the last month after corrections in January and February before the war started.

The last six quarters have been excellent for an industry, which has benefited from high international prices. Indian producers retired substantial debt, improving their balance sheets. Consolidated debt for the steel industry declined to Rs 2 trillion by Q1, 2021-22 from Rs 2.6 trillion a year before and further deleveraging has occurred in the last six months.

During the period FY2019-20 to Q3 FY2021-22 net debt has declined by 70 per cent for Jindal Steel & Power (JSPL), 50 per cent for Steel Authority of India (SAIL) and 30 per cent for Tata Steel. The Net debt/ EBITDA ratio for the consolidated industry is a decade-low.

ICRA expects domestic steel demand to continue rising in 2022-23, supporting capex plans. Exports should also rise due to Russia and Ukraine being out of the equation and emission-cutting plans in other regions including China. However, China demand has also declined, and if China’s real estate sector contracts, it could decline further.

Overall, the prospects look bright but there are downside risks due to several factors. The unpredictable geopolitics and high ore and coal prices plus threats of nickel and coal disruptions could lead to major supply disruptions or very high input costs, which cannot be passed on. China could make an about-turn and reopen high emission capacity increasing supply. Or China could squeeze real estate harder, cutting demand. India could see low demand in areas like real estate, and automobiles which may not be completely compensated by the promised infrastructure thrust in the Budget.

In the last 30 days the Nifty Metals index is up 6 per cent while the Nifty itself is down 10.8 per cent. This indicates a counter-cyclical hedging possibility across metals. The big winners in the Steel industry during this period include Tata Steel, which is up 10.75 per cent, Ratnamani Metals up 10.4 per cent, JSPL up 5.9 per cent and NMDC (which is a key player in the iron ore market) is up 2 per cent. However, Sail and JSW Steel have both seen a dip in share price although they are doing better than the overall market.