Robust demand amid lower iron prices to boost steel margins in H2FY22: Icra

With demand uptick stemming from the government’s thrust on infrastructure, mainly in the rural markets, capacity utilisation for medium and small long steel product manufacturers is expected to improve in the coming quarters, said Icra in its report on Friday.

While weak demand growth in domestic market saw larger players resorting to exports to cushion the Covid impact of the past 14-16 months, smaller players languished, the rating agency said.

“Over the past six years, given the multitude of policy and social/health disruptions, long steel demand grew at an anaemic six-year CAGR (FY2016-2021) of 1.4 per cent. So far, available demand has been largely absorbed by the larger long steel manufacturers leading to a significantly divergent capacity utilisation trends between them and smaller long-steel manufacturers. We expect this to correct as demand increases, pulling up capacity utilisation rates of small and medium sized manufactures,” Jayanta Roy, senior vice president and group head at Icra was quoted as saying.

During the past few weeks, iron ore prices have been correcting amid a decline in international prices and better availability in the domestic market. Further, since June 2021, international coking coal prices have almost doubled on increased ex-China demand. While large integrated steel manufacturers’ margins will continue to remain insulated from iron ore price movement, to the extent of their captive iron ore availability, the impact of higher coking coal prices will show up in the margins in H2 of FY2022, with a lag of about two months for imported coking coal. Icra expects the recent easing of iron ore prices in the country and sharp increase in coking coal prices, besides an improvement in capacity utilisation of smaller players, to lead to a narrowing of the margin gap between these two segments going forward.

Iron ore prices have been under pressure as China's demand for the commodity is expected to be lower with crude steel production plateaus and scrap-to-steel ratio rises, said metal miner BHP Billiton in its outlook on commodities.