Steelmakers’ earnings may improve on rising prices, volumes

Steel volumes, which have been soft since the onset of monsoon during Q2 FY2023, may recover marginally in the next three months, may recover significantly during Q4. The final quarter of the fiscal year was a seasonally strong quarter for steel sales. As domestic volumes improve, export volumes may also see some improvement. During November, export restrictions on various steel products were lifted.

Analysts at Axis Securities said, “For steel companies under our coverage, we expect revenue to grow sequentially due to higher sales volumes and increase in HRC (Hot Rolled Coil) prices due to the opening up of the Chinese economy “

data collected by Peppermint It also indicated that brokerages expect steel companies’ revenue to grow by 7.2% sequentially during the March quarter. Earnings before interest, taxes, depreciation and amortization (EBITDA) is expected to grow 15% sequentially, helped by the benefits of lower input costs triggered by sequential pricing improvements and the Clearance of high-cost raw material inventories .

For steel prices, the opening up of the Chinese economy is expected with the country being the biggest global consumer of the commodity. Thus, the steel price recovery in China meant that international steel prices found some support and domestic steel prices also saw some recovery. Analysts said despite some volatility in steel prices during the quarter, average prices are likely to remain higher sequentially.

“After struggling for two quarters, domestic steel prices recovered in Q4 FY23. Quarterly Average HRC (Hot Rolled Coil) Costs Up 6% Sequentially 59,189 per tonne, while rebar prices were up 9% sequentially 61,312 per tonne,” said analysts at Motilal Oswal Financial Services.

Analyst at Elara Securities India Pvt. Ltd. Ltd. is also expected to grow within the range of the blended realization of steel firms under their coverage universe 500-2,500 per ton respectively. On the volume front, JSW Steel is expected to post double digit volume growth. Analysts at Elara expect steel companies to report volume growth within a range of 1-18% sequentially on a sequential basis.

As steel prices improve sequentially, manufacturers who had seen cost pressure eating into their margins may get some respite. Raw material prices such as coking coal and iron ore continue to ease from higher levels and lower cost benefits may start trickling in from Q4, even as coal prices see some recovery from lower levels during Q4.

International iron ore prices, after ranging between $120-$160 per tonne during Q4 FY22, continued to slide down to around $80 per tonne during Q3. However, prices have since moved up on expectations of a pick-up in demand following the opening up of China in January; Nevertheless, they are at a much lower level than the peaks. The case of coal is also similar. Analysts said steelmakers in India typically hold two to four months of inventory and hence would benefit from lower cost raw material inventories in Q3 in Q4.

“Given the improved volumes as well as prices sequentially, and operating leverage benefits, we expect EBITDA/tonne growth for steel firms under our coverage universe. 100-2,300 sequentially,” said analysts at Elara Securities. On a year-on-year basis, the performance could remain weak as steel prices in Q4FY23 are much lower than a year-ago quarter Steel prices saw an unusual jump in the year-ago quarter following the start of the Russia-Ukraine war and remained flat until May 2022 before the export duty restrictions come into force.

Global concerns about recession have increased, which is pushing steel prices lower. Thus, after a very strong performance in Q4FY22 by steel makers, lifted by rise in steel prices, the performance of Q4FY23 may not quite match. data collected by Peppermint suggests that revenue during Q4 FY23 is likely to decline by 7.7% year-on-year. Further, on a year-on-year basis, Ebitda is expected to decline by 39.35% and net profit by 26.38%.