Safeguard duty, higher prices to keep steel makers' profitability steady

Crisil Ratings expects steel makers to maintain stable profitability in FY27 as higher domestic steel prices and safeguard duty offset rising coking coal, energy and logistics costs

India's primary steel producers are expected to maintain stable operating profitability this financial year despite a sharp increase in production costs, aided by higher domestic steel prices, continued protection from safeguard duties on imports and healthy domestic demand, according to Crisil Ratings.

 

The ratings agency expects operating profitability, measured by earnings before interest, tax, depreciation and amortisation (EBITDA) per tonne, to remain at ₹10,500-11,000 per tonne this fiscal, broadly in line with the decadal average, even as production costs rise by around ₹2,000 per tonne to ₹53,000-54,000 per tonne.

 

The assessment is based on a study of eight primary steel manufacturers, including JSW Steel, Tata Steel, Steel Authority of India (SAIL), Jindal Steel, ArcelorMittal Nippon Steel India, NMDC Steel, ESL Steel and Evonith Steel, which together accounted for around half of India's steel output in the last financial year.

   

The increase in costs will be driven primarily by higher coking coal prices, elevated logistics expenses and rising energy costs. Coking coal, which accounts for nearly 40 per cent of steel production costs, is expected to become 5-7 per cent more expensive amid potential supply disruptions in key exporting regions and sustained global demand. Freight, shipping, insurance, power and fuel costs are also expected to remain elevated.

 

However, Crisil said these pressures would largely be offset by a projected 6-8 per cent increase in domestic steel prices, supported by stronger global steel prices, the government's 11.5 per cent safeguard duty on certain flat steel imports and robust domestic demand.

 

"Higher global steel prices, continued protection under the 11.5 per cent safeguard duty and healthy domestic demand growth are expected to support a 6-8 per cent increase in domestic steel prices this fiscal. This will offset rising cost pressures and keep profitability steady," said Ankit Hakhu, director, Crisil Ratings.

 

Crisil said domestic steel demand is expected to grow 5-7 per cent this fiscal, supported by continued investments in infrastructure and healthy demand from the automotive, engineering and construction sectors.

 

Over the longer term, steel consumption is expected to expand at 6-8 per cent annually, aided by India's relatively low per capita steel consumption compared with the global average.

 

The favourable demand outlook is expected to keep investment activity buoyant. Crisil estimates that primary steel producers will spend ₹75,000-80,000 crore on capacity expansion and related projects this fiscal, up from around ₹70,000 crore in the previous year.

 

Investments will continue to focus on capacity additions, value-added products and backward integration, including captive mines and power plants.

 

According to the agency, nearly three-fourths of the planned capital expenditure is expected to be funded through internal accruals, with the remainder financed through debt. As a result, leverage is projected to improve modestly, with the net debt-to-EBITDA ratio declining to around 2.6 times by the end of this fiscal from 2.8 times a year earlier.

 

Crisil, however, cautioned that the evolving conflict in West Asia remains a key risk, as any escalation could further disrupt supply chains and push up input and logistics costs.