Softer Domestic Prices, Rising Input Costs to Weigh on Steelmakers’ Q3 Earnings
Overview of Steelmakers’ Q3 Outlook
Steelmakers are bracing for a challenging Q3, facing a potential decline in profitability due to softer domestic prices and escalating input costs. Despite previous benefits from operating leverage and lower iron ore prices, these advantages have been eclipsed by increasing coking coal costs and weaker selling prices.
Key Factors Affecting Steelmakers
– Profitability Decline: Steelmakers are projected to see a sequential drop in EBITDA by 9-21%.
– HRC Price Drop: A significant factor is the steep fall in domestic hot-rolled coil (HRC) prices, attributed to the expiry of the provisional safeguard duty in November, which wasn’t reinstated until the end of the December quarter.
– Current Pricing Trends: Domestic HRC prices have decreased by 4.5%, averaging ₹47,200 in the December quarter, while primary rebar prices remained stable, according to Motilal Oswal Financial Services.
– Import Pressure: The lapse of the duty has led to surging imports, putting further strain on realisations. It’s anticipated that realisations could fall by ₹1,500-2,000 per tonne, projecting a 9% decline in sector EBITDA.
Rising Costs for Steelmakers
– Coking Coal Costs: Ferrous companies have witnessed an increase of $3-5 per tonne in coking coal prices, which averaged around $210 per tonne during this period.
– Forecasts for Q3: Nuvama Institutional Equities anticipates EBITDA declines of 10-21% for steelmakers within its coverage.
Potential Recovery on the Horizon
While the current landscape appears challenging for steelmakers, future conditions may improve. The reintroduction of the safeguard duty on steel imports on December 31 is expected to bolster prices.
– Staggered Duty Implementation: The new three-year staggered duty starts at 12% in the first year, aiming to enhance pricing power for steel producers.
– Improvement in Price Dynamics: According to Axis Securities, The staggered safeguard duty will support steel prices. Mills are already adjusting their prices in anticipation of seasonal construction demand.
Non-Ferrous Metal Producers’ Positive Outlook
In contrast to their ferrous counterparts, non-ferrous metal producers are positioned for a robust Q3, buoyed by a surge in global commodity prices:
– Price Increases: Prices for zinc, silver, and aluminium increased by 14%, 43%, and 10% respectively in U.S. dollar terms during this quarter. Additionally, copper prices at the London Metal Exchange (LME) rose nearly 20% to $12,500 per tonne, driven by expected U.S. tariffs on refined metals and supply disruptions in key mining regions like Chile and Peru.
– Revenue and Profit Growth: Motilal Oswal Financial Services forecasts revenue growth of 5%, EBITDA growth of 12%, and a net profit increase of 18% for non-ferrous companies, mainly due to higher realisations and volume improvements.
Conclusion
As steelmakers navigate through softer domestic prices and rising input costs, a cautious outlook for Q3 is expected. However, the reintroduction of the safeguard duty may pave the way for a recovery in pricing power in the coming months. Meanwhile, non-ferrous metal producers appear set for strong performance, capitalizing on favorable market conditions. The dynamics within these sectors will be critical to monitor as the economic landscape continues to evolve.