Covid-19-led demand destruction, firm input costs to impact steelmakers

While realisations take a hit, pressure on margins may intensify with input costs remaining steady.

The outlook for domestic steel prices, which has largely remained firm till third week of March, now appears bleak. Domestic steel prices, which had been trading at a premium to international prices, will face pressure as the lockdown is leading to a build up of inventories. CARE Ratings says that the performance of domestic steel makers is likely to be adversely impacted in Q1FY2021 as a result of Covid-19 pandemic and the 21-day nationwide lockdown.

Just a few days ahead of the lockdown, steel prices in the month of March corrected 2 per cent, while those in Far Eastern countries cooled off by 6 per cent on an average. This had already led to domestic prices trading at a 2 per cent premium to the landed price of steel from countries in the Far East, according to analysts' data. Apart from cooling prices, the impact of lockdown on demand and rising inventories are likely to put further pressure on domestic steel prices.

The impact on performance will not only be led by demand loss and realisations, but also pressure on margins. The latter is expected to be led by higher input prices apart from weaker steel pricing. The aggressive bidding in recent mine auctions in Odisha will keep iron ore costs high in the near term, feel analysts. The normalising situation in China means that Chinese demand for iron ore and coal will start rising, thereby keeping input prices steady. Thus, while realisations take a hit, pressure on margins may intensify with input costs remaining steady.

The start of production in China would also mean higher Chinese exports. China has recently increased VAT rebate on exports from 9 per cent to 13 per cent. This would also mean reduced opportunities for Indian exporters. Manufacturers as JSW Steel, which have exposure to exports, may feel the heat not only in Asia but in Europe too.

Further, with rising inventories and higher input costs, the manufacturers may see an impact on their working capital requirements as well.

Not surprisingly, analysts at Emkay Global say they expect steel margins to contract sharply in Q1FY21 and continue at the same levels till Q2FY21 given the onset of monsoons, which is traditionally a soft period. Analysts have been generally cutting target prices for Tata Steel, JSW Steel, Jindal Steel & Power (JSPL), even as the stocks tradrd near 52-week lows.