Thursday, June 30th, 2022
CECR

Strong Demand And Falling Iron Prices To Boost Fortunes Of Medium And Small Long-Steel Product Manufacturers In H2 FY2022: ICRA

 

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The sagging fortunes of long steel product manufacturers are set to revive strongly in coming quarters, following years of anaemic growth, driven by increased construction activity. In particular, medium and small long-steel product manufacturers who unlike their larger peers have suffered more during recent years will benefit now from this strong demand uptick.

On this, Mr. Jayanta Roy, Sr. VP and Group Head says, “Over the past six years, given the multitude of policy and social/health disruptions, long steel demand grew at an anaemic 6-year CAGR (FY2016-2021) of 1.4%. So far, available demand has been largely absorbed by the larger long steel manufacturers leading to a significantly divergent capacity utilisation trends between them and smaller long-steel manufacturers. We expect this to correct to an extent in the coming months as demand increases, pulling up capacity utilisation rates of small and medium sized manufactures, since larger players have been operating at healthy rates anyway.”

Unlike past cycles, when steel prices and coking coal prices moved in tandem, international trade disturbances decoupled prices of these two commodities since the second half of FY2021. Consequently, the steep steel price rally and benign coking coal prices led to a sharp increase in contribution margins of larger players to all-time highs in FY2021 and Q1 FY2022, improving their credit profiles significantly. On the other hand, with prices of sponge iron, scrap and non-coking coal, which are typically the raw materials used by small and medium players increasing significantly over the same period, margins of smaller players were impacted.

During the past few weeks, iron ore prices have been correcting amid a decline in international prices and better availability in the domestic market. While large integrated steel manufacturers’ margins will continue to remain insulated from iron ore price movement to the extent of their captive iron ore availability, the impact of higher coking coal prices will show up in the margins in H2 FY2022. ICRA expects the recent easing of iron ore prices in the country and sharp increase in coking coal prices, besides an improvement in capacity utilisation of smaller players, to lead to a narrowing of the margin gap between these two segments going forward.

Adds Ms. Pavethra Ponniah, Sr. VP and Co-Group Head, ICRA, “The decoupling of price trends between steel and coking coal over the past several quarters has begun to reverse after May 21. This will impact margins of large steel manufactures in H2 FY2022. At the same time, increase in capacity utilisation and easing iron ore supply/prices in the domestic markets will benefit smaller players.”

For further information,
visit: www.icra.in

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