Steel segment looks up due to domestic economic recovery

The steel and the metals and the mining sector is witnessing healthy growth due to demand revival in autos, white goods, infrastructure and trade re-stocking with lower coking coal prices. Besides this, the prices for steel, iron ore and non-ferrous metals also rallied throughout Q3 of the current fiscal quarter, driven by pent-up domestic demand, domestic economic recovery and a hike in international prices. It has been observed that domestic steel prices had defied predictions and ascended through the December quarter due to high global prices, tight domestic supply on account of iron ore shortage and healthy demand growth. It is expected that the sector will further have a healthy run during the Q4 of the current fiscal.

A recent report by CRISIL has observed that steel makers in India have raised the prices of hot rolled coils (HRC) multiple times since August, rising by as much as Rs 13,800 per tonne to Rs 51,050 per tonne in December (37 per cent year on year growth). However, it was observed that despite this material increase, domestic prices are still 6-8 per cent below global landed prices. CRISIL further points out that domestic steel prices may further increase if they move in synchronisation with the world trend.

Interestingly, global steel prices also touched an eight-year high in December due to healthy demand and cost push from soaring iron ore prices. Chinese crude steel production increased 8 per cent in the period, while exports and inventories remained low indicating robust demand growth there.

CRISIL experts expect steel prices to remain high in the January-March 2021 (Q 4) quarter with a sequential price hike of Rs 7,000 to Rs 8,500 per tonne. Domestic demand recovered to the pre-pandemic (February 2020) level in August itself with normalisation of activities in the construction and consumption-linked sectors, but a full-blown recovery was seen only in November when sales volume surged 11 per cent year on year.

Domestic iron or supply could not match demand from steel mills as only 6-7 of the 19 auctioned mines in Odisha could begin mining operations. Of these, most were won by steelmakers for captive consumption. The 19 mines used to sell 65-70 million tonne of iron ore to merchant markets in east India. Supply constraints due to this further increased domestic iron ore prices, which more than doubled from May-June levels to Rs 4,360 per tonne in December.

Coking coal prices, on the other hand, have declined, led by low procurement from China amid stable supply. Improved realisation, healthy demand and lower coking coal prices will help the operating margins of steel mills, especially in the second half of the current fiscal. As a result, large steel mills, excluding the public sector ones, are expected to see margin expansion this fiscal.

A report by Emkay Global Financial Services points out that there could be underlying risks to the steel segment in India. A possible slowdown in stimulus in China, any sort of regulation on domestic steel prices, removal of ban on coal imports in China (Australia origin) and contraction in demand in China are the key risks that can have an effect on the steel segment.

However, a few experts believe that a hike in key raw material such as steel in the recovery phase of the economy is highly detrimental for MSMEs, and is likely to affect the implementation of government's infrastructure projects.

“On average, depending on different regions of the country, the input cost for steel has risen by 35-40 per cent and cement by 23 per cent in the last few months. We are facing a challenge of price rise when it comes to key input materials like cement and steel. The real estate sector is a part of various central government schemes like affordable housing and housing for all by 2022. The rising input cost will leave no option for developers but to pass it on, the same will lead to a reversal of all reform measures taken by the government,” said Krish Raveshia, CEO at Azlo Realty.