Margin Pressure To Ease For Steel Makers In The Second Half: CRISIL

The operating margin of domestic primary steelmakers is estimated to fall to 14-16% in the first half of this fiscal, compared with a decadal high 30% for the whole of last fiscal, due to high input costs, lower realisations and imposition of export duty on finished steel products, among other reasons, CRISIL has stated.

"In the second half of this fiscal, however, margin pressure is expected to ease - led by lower production cost because of declining raw material prices and steady realisations backed by robust domestic demand - lifting it above 25%.

Consequently, operating margin will be a robust 22-24% for the full fiscal - a good 700-800 basis points (bps) lower on-year2, but higher than the pre-pandemic average of ~20% logged between fiscals 2017 and 2020," the ratings agency has stated.

The first quarter of the fiscal witnessed significant decline in steel prices with high input costs. Though input prices have since corrected, its impact will be felt only towards the end of the second quarter, leading to a subdued first half.

Global coking coal, a key raw material that comprises ~40% of the production cost and is usually imported by domestic steel manufacturers, has seen the price plummet from a historical high of ~$600 per tonne in March to ~$250 in August due to improved supply from Australian mines and weakening demand from global steel producers. The price is expected to remain benign as supply improves and the global demand outlook remains weak.

Says Ankit Hakhu, Director, CRISIL Ratings, "Iron ore, sourced domestically and accounting for 15-20% of the production cost, has also shed more than 50% in price since May 2022 on account of increased domestic supply due to imposition of export duty of 50% on iron ore and 45% on pellets. The lower raw material prices, mainly global coking coal and domestic iron ore, may reduce production cost for domestic steelmakers by ~30% in the second half this fiscal."