High input cost, weak steel prices to hit steel industry earnings: Icra

Spot coking coal prices hurting firms' earnings, but industry's absolute profitability metrics will remain at healthy levels in next 12 months; ratings agency maintains 'Positive' outlook for sector

Higher input costs coupled with softening steel prices is expected to hurt earnings of the domestic steel industry from December quarter onwards, ratings agency Icra said on Monday.

Among the input costs, skyrocketing coking coal prices in the spot market is hurting companies’ earnings, it said.

Nonetheless, the industry’s absolute profitability metrics will still remain at healthy levels in the next twelve months, leading the ratings agency to maintain a ‘Positive’ outlook for the sector.

In the last quarter, Q2FY22, despite a sequential moderation in steel spreads due to cost pressures, the domestic steel industry was able to record another all-time high quarterly profit, largely supported by higher deliveries following the recovery in economic activity post the second wave.

Input cost pressures for domestic mills could moderate somewhat towards the later part of Q4 FY2022, as seaborne coking coal prices have declined by 20 per cent since the highs of mid-November 2021, the benefit of which would slowly get reflected in mill margins after a lag of 2-3 months, said Icra.

“Our calculations suggest that the consumption cost of coking coal is expected to increase by around 65-70 per cent sequentially in the third quarter,” Jayanta Roy, senior vice-president and group head, corporate sector ratings at Icra was quoted as saying.

The World Steel Association’s latest short-range outlook forecasts a strong steel demand recovery in the ex-China steel markets of India, Japan, South-Korea, USA, Europe, and the CIS countries in CY2021 and CY2022, benefitting from higher vaccination rates and Government fiscal stimulus measures.

The post-monsoon demand recovery in India has been showing positive signs, with the monthly finished steel consumption in October 2021 reaching a seven-month high of 8.8 million tonne and representing a sequential uptick of around 7 percent over the previous month.

However, if the rapid spread of the Omicron variant leads to an unanticipated disruption in economic activity in the key steel-producing hubs as mentioned above, then the industry could see an accelerated process of reversion of spreads in FY2023, much sooner than what is anticipated today, said Icra.

This remains a key risk which could well determine the durability of the current upcycle.