Rating agency Icra said on Thursday it has revised its outlook for domestic steel from positive to stable, mainly due to rising input costs amid low steel tariffs.
After two consecutive years of profit growth, steel companies now look to a significant drop in profits in the next 12 months as the industry faces multiple headwinds from trade barriers from export duties on finished steel, unprecedented coal/energy cost pressures and up to domestic demand has seen moderate growth so far, Icra said in a report.
The industry could therefore be moving towards an accelerated mean reversion as the working environment becomes much less attractive in the coming months. Such challenges would be accentuated by high inflation and the push for policy rate hikes, it said.
“While forecasted domestic demand growth for FY23 is kept unchanged at 7-8 percent, the sector’s total corporate profits for the fiscal year are being revised down about 30 percent… as margins come under pressure between lower steel prices and higher input costs. Therefore, the rating agency has revised the outlook for the sector from positive to stable,” the report said.
In current FY23, corporate profits of steel companies are likely to be 40-50 percent lower than in FY22.
Jayanta Roy, Senior Vice President & Group Head, Corporate Sector Ratings, Icra said the steady rise in the cost of coking coal was beginning to nibble on steelmakers’ margins even before the export tax was announced. As a result, consolidated operating profit per tonne for the four leading domestic steelmakers declined approximately USD 110/MT in Q4 FY22, compared to $326/MT in Q1 FY22.
“With domestic prices for hot rolled coils correcting by about 9 percent since the imposition of export duties, and with the cost of coking coal consumption poised to rise by about 30-35 percent quarter on quarter, notwithstanding Following the correction in domestic iron ore prices, the sector’s corporate profits are expected to decline sequentially by $80-90/MT in Q1 FY2023,” he said.
