JSW Steel To Tata Steel Stare At Margin Squeeze As Prices Slump 8% After Export Duty

For India's steelmakers, export duty couldn't have been more ill-timed. Domestic demand has been subdued, prices were already falling and the seasonally week monsoon period has kicked off.

The benchmark steel prices have been falling since April peak. The export levy only accelerated the slide. Domestic hot-rolled coil and cold-rolled steel have declined Rs 5,500 and Rs 6,300 a tonne, respectively, over the last two weeks, according to data compiled from Steel Mint. That's a drop of 8% each during the period.

India's steel demand has been faltering since September, with marginal growth in January and April this year. The economy recovers slower than anticipated because of disruptions from the third wave of the pandemic and mounting risks from costlier commodities amid Russia's invasion of Ukraine.

A decline in sales of passenger vehicles and two-wheelers in the last one year, too, weighed. Steel, according to Tata Steel Ltd.'s website, contributes 60-65% of the total raw material in an average Indian vehicle.

JSW Steel Ltd. in its fourth-quarter analyst call said it expects steel consumption to grow 7.5% in the ongoing financial year.

Nomura is less sanguine, expecting 4% growth in FY23. The demand, the brokerage said, is largely from building contractors purchasing steel products only for immediate use.

A 15% export duty on steel is also likely to further drag down an oversupplied domestic market. Analysts, including at JPMorgan and Jefferies, termed it as “negative” for the sector. Jindal Steel & Power Ltd. said the levy “will not be competitive” even as it sees the move as “temporary” and expects “things to be normalised” by July.

Still, the levy will eventually hurt the mills' margin.

Indian steel producers are “staring at a sharp correction in margin in the first half of FY23 led by a combination of weak regional prices as Covid-led lockdowns in China impacted demand more than supply, stubbornly high coking coal prices, lower steel realisation led by weaker export prices, lower domestic prices on demand weakness and imposition of export duty on steel”, Kotak Securities said in a report.

Seshagiri Rao, joint managing director at JSW Steel, told BQ Prime that on one hand coking coal prices have been rising and on the other realisations have been shrinking. This might have a bearing on the margin.

TV Narendran, managing director at Tata Steel, sees that as an even bigger concern than export duty. Coking coal prices are still over $500 a tonne, he told BQ Prime in Davos. “It doesn't show any sign of coming down in a hurry and that's a concern, because that's a huge input cost for us.”