Steel firms face margin dip due to higher input costs, currency fluctuation

While domestic demand for steel is seen growing 6 to 7 per cent in 2019, the margins of large producers could come under pressure due to higher input costs. Firms need to watch currency fluctuation, cheaper import, and volatile coking coal prices, said industry officials. JSW Steel, Tata Steel, Jindal Steel & Power, and two state-owned entities, Steel Authority of India and Rashtriya Ispat Nigam are the large producers.

“Since most of these blast furnace players have no captive coal supply, prices of coking coal, coupled with the exchange rate, will play a crucial role in governing companies’ margins, as input costs will fluctuate,” says Jayanta Roy, senior vice-president at ratings agency ICRA.

Iron ore and coking coal are the two key raw materials in the making of steel, together more than half the total cost. Since April, the global price of coking coal has oscillated between $180 and $225 a tonne. The rupee was 74 to a dollar in October, after weakening from 65 in April, and is now about 70. 

“Where the tariff war between China and the US leads would be of importance, as it would change the demand-supply equation of several commodities, also impacting import of steel into India,” explained Roy.

Globally, hot-rolled coil is $480 a tonne at present, down from the government-set minimum import price of $489. The domestic price of HR coil is $580-600 a tonne. If the landed price of steel levels up to the domestic price amid the tariff war, trade opportunities will emerge for global markets, creating stiff competition for domestic players, said industry officials. Though 2019 is also a general election year for India. “There won’t be any new projects announced for a span of three to four months ahead of elections but, overall, I don’t see steel demand getting, affected as ongoing projects will continue. There is a sizable requirement for steel that will continue to come,” said Sushim Banerjee, director-general at the Institute of Steel Development & Growth.

Small and medium enterprises (SMEs) in the industry will have their share of issues. “It being an election year, government support will be missing for them. Due to this, arrangements for raw material tie -up might not be easy for them. Large players will get into long-term deals and smaller players will be at the mercy of the open market,” said Banerjee.

Nearly half the domestic steel industry comprises SMEs, of which sponge iron and induction furnace units are a part. Industry officials expect nearly half the SME segment to get affected next year on account of raw material tie-up issues.