Export levy, domestic surfeit can dent bottom lines of steelmakers

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ETIntelligence Group: India’s top steel companies are expected to take a hit on their profitability because of the increase in export duty. Domestic steel prices have fallen 8% since the duty was increased late last month and may correct further, say analysts, even though manufacturers had guided for a limited impact from the event.

In fact, since the beginning of the ongoing fiscal year on April 1, domestic steel prices have come down by 17%, and are now below their year-ago levels. However, raw material prices remain elevated, which would weigh on the performance of steelmakers such as

, , and .

Much of the fall in domestic prices is linked to the duty hike, as international steel prices (Chinese FOB prices) are down only 9% since April 1.



Steel prices are currently around ₹63,500 a tonne compared with ₹67,000 in June last year. During the same period, the prices of key raw materials, coking coal and iron ore increased by 140% and 49%, respectively. This could lead to a sharp reduction in profitability for the steel manufacturers in FY23.

Just to give a perspective, Ebitda/tonne for the March quarter for Tata Steel (India), JSW Steel, JSP and SAIL were lower by 30%, 48.5%, 47% and 55%, respectively, from their peak (in the quarter ended June 30, 2021). For Tata Steel, the impact was the least because it owns iron ore mines. The coming quarters could see a further deterioration in this performance, as analysts say the likely fall in exports due to the higher duty would not be offset by local consumption, as the domestic market cannot absorb the excess capacity created over the years.

Agencies

India’s total steel capacity is 149 million tonnes (including semifinished steel), while its local consumption is only 106 million tonnes. The capacity has increased close to 7% over the past 15 years, while consumption has increased by a little over 5%.

In FY22, India exported 13.5 MT (18.5 MT including semifinished steel). Out of this close to 10.5 MT were of flat, cold-rolled and other value-added products. Companies have said on record that they will continue to export these value-added products, at the cost of their profitability, as they cannot stop business with clients developed over the years. The remaining 3 MT (8.5 MT including semifinished steel) will be routed to the domestic market, which will lead to higher local supplies and thus lower realisations.

Earnings for steel companies are very sensitive to external factors. In the past, these companies have seen from going highly profitable to loss-making in less than a year.

Developments over the past few weeks have left some analysts downgrading earnings estimates of the sector. The estimated earnings for FY23 for the top four players are expected to be significantly lower – for some, less than half – compared with FY22. However, valuations remain on the higher side, so investors may be better off avoiding these stocks.

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