Steel firms’ operating margin to fall by 500 bps, says Crisil

Steel firms’ operating margin to fall by 500 bps, says Crisil

Steel firms would still ‘generate healthy cash flows’ as operating rates are expected to be highest in the past five fiscals at around 90%, supported by robust domestic demand and greater export opportunities.

Operating margin of domestic primary steel makers will get squeezed by around 500 basis points to 24-26% this fiscal on soaring prices of raw material, especially coking coal, rating agency Crisil said on Friday.

However, despite the moderation, their margin will remain higher than the average of 21% between FY17 and FY21, it said.
Steel firms would still ‘generate healthy cash flows’ as operating rates are expected to be highest in the past five fiscals at around 90%, supported by robust domestic demand and greater export opportunities.

Crisil said the prices of coking coal, which account for a third of production cost of domestic steelmakers, rose 400% to $600 per tonne within last fiscal, primarily because of delayed production ramp up in Australia, world’s largest exporter of coking coal and the suspension on Russia since it invaded Ukraine in February.

“While coking coal prices have moderated to around $450-500 per tonne in April, they are expected to be higher by over 50% this fiscal on-year. We expect other costs, including that of iron ore, to remain stable. Net-net, the cost of production of domestic primary steel makers will still rise by over 20% this fiscal to the highest level in a decade,” said Ankit Hakhu, director, Crisil Ratings.

As against this, average domestic steel prices are not expected to rise more than 5% on-year. That is because these prices are influenced by the landed cost of imports. Currently, the discount is negligible at around 2%, compared with an average around 3% over fiscals 2019 to 2021. This limits the cushion for domestic producers to take material price hikes, Crisil said.
Further, global steel prices are not expected to rise significantly due to concerns over demand in China following a rash of Covid-19 infections leading to lockdowns there. Also, prices could even moderate if geopolitical tensions ease, given Russia is the second-largest steel exporter in the world.

In a separate note, Crisil said domestic aluminium prices, which surged to Rs 300 per kg in March 2022, are expected to gradually decline in the second half of this fiscal and average Rs 225-235 per kg for the whole fiscal, in sync with the global trend.

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