Here's Why Steel Industry's Q2 Profits Is Seen Intact Despite Soaring Input Prices
Motilal Oswal expects steel companies' Q2 profit to remain steady despite higher input costs due to a 60–90-day inventory lag.
Due to the lag in inventory, the rising raw material prices are unlikely to have an impact on the Indian steel industry's second-quarter profit.
Coking coal and iron prices have risen over 20% since their lowest levels in 2023. They are the most important raw materials in steel production.
However, since steel companies face an inventory lag of 60–90 days, according to Motilal Oswal Financial Services Ltd., profits for the July–September quarter could be intact. This implies that the current increase in input prices will only affect margins and profitability after a couple of quarters.
Why The Price Surge?
Prices of Australian premium hard coking coal increased by $31.5 to $312 per tonne on Sept. 13 due to the suspension of production in two Australian mines, according to CoalMint. This will have a bearing on Indian steel makers since Australia accounted for 68% of India’s coking coal imports in 2022.
Iron ore prices are at a five-month high on signs of recovery in China’s struggling property sector, as new loans surged 293% over July to 1.36 trillion yuan. Steel output also rose 2.5% year-on-year in the first seven months of 2023, pushing iron ore prices higher. The price rally, however, may be limited as Chinese steel mills will have to cut production to maintain the unofficial policy of keeping steel output unchanged in 2023..
Impact On Profitability
Coking coal accounts for 40–50% of steelmaking costs, according to ICRA estimates. However, on account of an inventory lag for coking coal and iron ore, the current surge in prices may impact margins only from the fourth quarter onward.
The ongoing momentum in domestic steel prices may possibly offset the cost increase in the coming quarters. Flat steel prices have been hiked by 4–5% and long prices by almost 8% in the second quarter, according to ICRA data.
Prices have been hiked despite Q2 being a seasonally weak quarter on account of monsoons, indicating resilient steel demand in India. Possibility slips in this momentum are few going forward, as steel makers look to mitigate the impact of rising coking coal prices while capitalising on the strong domestic pre-election demand.
For the second quarter of FY24, profits are expected to surge. This is on account of the over 20% decline in coking coal and iron ore prices seen over the past two quarters. The quarter is set to have the highest steel spreads in over six quarters, according to ICRA estimates.
