Steel manufacturers' margin will improve in the second half of the year, says CRISIL

9 Sep 2022 , 08:18 AM

According to a forecast by CRISIL, steel producers will experience better times starting in the second half of the current fiscal year as lower input costs and strong domestic demand would lessen margin pressure and raise operating margins to over 25%.

According to CRISIL’s research, the industry was negatively impacted by high input costs in the first quarter and is continuing under pressure in the current second quarter.

Due to high input costs, lower realizations, and the imposition of export duty on finished steel products, among other factors, primary steelmakers’ operating margins are likely to decline to 14—16% in the first half of this fiscal, drastically down from 30% last fiscal, which was a decadal best, Crisil added.

However, the margin pressure is anticipated to lessen in the second half due to lower production costs caused by falling raw material prices and sustained realizations supported by strong domestic demand, raising it by over 25%, according to the research.

As a result, the operating margin for the entire year will be a healthy 22—24%, which is higher than the pre-pandemic average of 20% logged between fiscal years 2017 and 2020 but still 700—800 bps lower than last year.

It should be noted that due to increased supply from Australian mines and declining demand from international steel producers, the price of coking coal, a crucial raw material that accounts for 40% of production costs and is typically imported by domestic steel manufacturers, has dropped from a historical high of USD 600 per tonne in March 2022 to USD 250 in August.

Decreasing pricing for raw materials, namely domestic iron ore and worldwide coking coal, could reduce manufacturing costs by 30% in the second half of this fiscal year.

Due to the relaxation of COVID limitations in China and increased anticipation of fewer production curbs to achieve decarbonization objectives in the second half, global prices are anticipated to stay range-bound for the duration of the fiscal year.

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