NEW DELHI: Profits of steel companies are likely to come under pressure in the ongoing first quarter of the financial year, due to the high cost of operations and lower demand.
Domestic steel demand eased to 7.5 per cent last fiscal from 7.9 per cent logged in the financial year 2017-18, due to liquidity and fuel price concerns in the auto sector, and it moderated further to 6.4 per cent in April.
“It is likely that the demand would remain lower on the back of continued weakness in the auto sector and reduced construction-related activities during the general elections period,” said Jayanta Roy, senior vice-president and group head, corporate sector ratings, ICRA.
This apart, higher coking coal prices are likely to affect the financial performance of domestic steel-makers. “Gross margin of domestic steel companies has fallen by about `3,000 a tonne in March quarter (FY19) and it will come down further by `400-500 a tonne in June quarter (FY20), due to high coking coal prices and pressure on steel prices,” Roy said.
However, the construction sector would be at the forefront of the demand recovery in the second half of FY20 on the back of an expected boost to the infrastructure sector.
Meanwhile, the steel companies have benefited from glut in iron ore supply due to a significant ramp-up in mining activities in Odisha, where a large number of iron ore mine leases would expire next March. This has helped partly insulate domestic ore prices from the steep rally in seaborne prices following the supply disruptions from Brazilian miner Vale, Roy said.
Cashing in
Secondary steel producers benefited from fall in the thermal coal prices. Coal India’s spot e-auction premiums declined to 69 per cent in April against 92 per cent in the same period preceding year.