A few years ago, steel companies all over the world went through a rough patch that eroded their profitability considerably. But over the past two years, favourable global conditions, such as capacity cuts by Chinese steel plants and increasing demand for the metal, along with various initiatives by the Indian government, have helped steel makers in the country turn their losses around.
Besides a healthy growth in revenue, operating profits of steel makers have also improved in FY 2017-18. This was mainly because of better realisations for steel products, and fairly stable raw material costs.
Increased realisations
After being in a slump for more than a year, domestic steel prices started to rise from the second half of 2016. The realisations from HR coils shot up from ₹28,900 per tonne in mid-2015, to ₹44,700 in April 2018.
The price movement in HR coils in FY18 was impressive too. Hovering around ₹37,770 per tonne towards the beginning of the financial year, they increased 16 per cent to end the year at ₹43,800 a tonne.
In addition to the good supply-demand equation, the increase in raw material costs during some months also helped companies jack up their selling prices.
This upward trend is reflected in the domestic steel companies’ improved realisations. For instance, JSW Steel’s realisations moved up 15 per cent to ₹45,104 in the March quarter of FY18, compared with the first quarter in the same year. This increase is also due to its focus on value-added and speciality items in its product mix, that enjoy a premium over other finished steel products.
Domestic prices are relatively lower than international prices; therefore, there seems to be more scope for improvement in realisations for Indian steel-makers.
Mixed impact of input costs
Falling raw material costs too helped improve profitability; the prices of iron ore and coking coal — the two key raw materials used to manufacture steel — play a vital role.
Coking coal, which is mostly imported by steel companies, has moved down 16 per cent from $263 per tonne a year ago to $219 per tonne in March 2018. To reduce the cost incurred on coking coal, steel companies are constantly innovating to find better techniques to reduce its usage. For instance, Tata Steel reduced the consumption of coking coal by 3 per cent to 348 kg/thm in FY18.
However, iron ore was on an upward trend last fiscal. Prices (for 65 per cent and above Fe lumps) increased 33 per cent from ₹3,000 per tonne in the beginning of FY18 to ₹4,000 per tonne in February 2018. Major companies that have captive iron ore mines were immune to the rising prices, unlike those that acquire the raw material from the market.
For instance, the raw material cost per tonne for JSW Steel, which has to acquire a part of its iron ore requirement from the market, increased by almost 8 per cent y-o-y to ₹25,360 per tonne in the quarter ending March 2018.
On the other hand, captive iron ore mines helped Tata Steel rein in input costs. The company’s raw material cost per tonne fell to ₹14,233 in the March quarter, from ₹17,692 in the quarter ended September 2017.
Imported steel gets pricier
With global steel prices also on an upward trend, the domestic prices as well as the landed cost of steel (HR coils) have gone up in the last year by 18 and 22 per cent respectively. While domestic prices were higher than landed price in July 2017, the increase since then has taken the imported price to ₹47,079 per tonne, while the domestic price is ₹43,800. This gap provides domestic producers leeway to further increase their selling price.
However, the risk of regulatory intervention to cap the steel price hike remains in India. This can check runaway steel prices. Going ahead, global trends will also have a bearing on domestic steel prices.
(The prices of coking coal, iron ore, domestic and landed cost of steel are taken from CRISIL.)