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 of approx 30% for the whole of last fiscal. This reason for fall is due to high input costs, lower realizations and imposition of export duty on finished steel products, said Crisil Ratings Agency.
However, margin pressure is expected to ease in the second half of this fiscal, led by lower production cost because of declining raw material prices and steady realizations backed by robust domestic demand, expected to be 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-year, but higher than the pre-pandemic average of ~20% logged between fiscals 2017 and 2020.
The first quarter of the fiscal year witnessed significant decline in steel prices with high input costs. Meanwhile, input prices have since corrected, its impact will be felt only towards the end of the second quarter, leading to a subdued first half, the rating agency added to its report.
Global coking coal, a key raw material that comprises of about 40% of the production cost and is usually imported by domestic steel manufacturers, has seen the price declined from a historical high of ~$600 per tonne in March to ~$250 in August month due to improved supply from Australian mines and weakening demand from global steel producers. The price is expected to remain temperate as supply improves and the global demand outlook remains weak.
The Director of CRISIL Ratings Ankit Hakhu said, “Iron ore, sourced domestically and accounting for 15-20% of the production cost, has also declined 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 approx 30% in the second half this fiscal year.”
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