Primary steel makers to maintain profitability despite rising costs; strong accruals to support capex: Crisil Ratings
Mumbai, August 6
India's primary steel producers are expected to maintain stable operating profitability this fiscal despite rising input costs, supported by higher domestic steel prices, safeguard duty protection and healthy demand growth, according to a Crisil Ratings report.
The report projected operating profitability, measured as EBITDA per tonne, at Rs 10,500-11,000 per tonne in the current fiscal, broadly in line with the decadal average, even as production costs are expected to rise by around Rs 2,000 per tonne to Rs 53,000-54,000 per tonne.
According to the report, higher global steel prices, the continued impact of the 11.5 per cent safeguard duty imposed last year and healthy domestic demand are expected to support a 6-8 per cent increase in domestic steel prices, helping offset rising cost pressures.
"Higher global steel prices, continued protection under the 11.5 per cent safeguard duty and healthy domestic demand growth are expected to support a 6-8 per cent increase in domestic steel prices this fiscal. This will offset rising cost pressures and keep profitability steady," said Ankit Hakhu, Director, Crisil Ratings.
The report said production costs are expected to increase due to higher coking coal prices, elevated logistics expenses and increased power and fuel costs.
Coking coal, which accounts for nearly 40 per cent of production costs, is projected to become 5-7 per cent costlier amid potential supply disruptions in key exporting regions and sustained demand from major steel-producing countries.
Domestic steel demand is expected to grow 5-7 per cent this fiscal, supported by continued investments in infrastructure and robust demand from the automotive, engineering and construction sectors.
The report also maintained a positive long-term outlook, projecting steel consumption growth of 6-8 per cent annually, supported by India's relatively low per capita steel consumption.
The favourable demand outlook is expected to support continued capacity expansion, with primary steel producers projected to incur Rs 75,000-80,000 crore of capital expenditure this fiscal, compared with around Rs 70,000 crore last fiscal.
According to Crisil Ratings, healthy cash accruals are expected to fund nearly three-fourths of the planned capex, with the remainder financed through debt. As a result, leverage is expected to improve modestly, with the net debt-to-EBITDA ratio declining to around 2.6 times by the end of the fiscal from 2.8 times a year earlier.
The report, however, cautioned that the evolving conflict in West Asia remains a key risk, given its potential to disrupt supply chains and further increase costs.
— ANI
Reader Comments
Interesting analysis from Crisil. The 11.5% safeguard duty is doing its job protecting domestic industry. But I do wonder about the end consumer - if steel prices go up 6-8%, won't that impact construction costs for housing? Everything is interconnected in the economy.
Finally some positive outlook for manufacturing. With China's slowdown, India is becoming the next steel powerhouse. The 6-8% growth in demand is very promising - our per capita consumption is still low so there's huge headroom. But West Asia conflict remains a concern for sure.
The capex of Rs 75,000-80,000 crore shows confidence in the sector's future. But we should also focus on sustainable steel production. With rising coking coal costs, maybe it's time to accelerate the shift towards green hydrogen-based steelmaking. Otherwise we'll be tied to volatile coal prices forever.
Let's be honest - the safeguard duty is a double-edged sword. It protects our industry but also leads to higher prices for consumers. The government should ensure this protection is temporary and use the time to make our steel sector globally competitive. But overall, good news for the economy. 🙏
As someone who follows the global steel market closely, India's 6-8% expected demand growth is quite remarkable when you compare with mature markets. The infrastructure push by the government is real - I see it in the construction activity. Strong fundamentals here.
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