Steel players are capitalising on an increase in prices and that has boded well for the overall sector. Domestic flat steel prices have nearly doubled to Rs 72,000 per tonne in June from Rs 38,000 per tonne a year ago. Similarly, in comparison, long steel prices rose 1.4 times to Rs 57,900 per tonne. The price rally is likely to benefit through the first half of this fiscal, too, with flat steel prices already up 70 per cent since April. A recent report on the steel sector by CRISIL expects that while prices will soften in the second half, they would still be 40-45 per cent higher year-on-year.
The CRISIL report points out that the top four steel makers in India reduced their net debt (in their Indian operations) by Rs 34,000-35,000 crore as their EBITDA nearly doubled during the fiscal 2021. They were in fact able to reduce net debt by almost 16 per cent for their Indian operations. It is expected that during the current fiscal deleverage, balance sheets are expected to drive capacity expansion plans (both brownfield and greenfield) of the steel players and their capital expenditure to their previous peaks. It is further expected that the capex deferred during the previous cycle will also kick in. The report points out that the ongoing capex cycle will continue to be driven by large steel makers, which are expected to add more than 95 per cent of their new capacities coming on stream over the medium term.
The improvement in the steel segment was also driven by supply-chain efficiencies, higher exports, and captive mines that limited the impact of iron ore shortage. The CRISIL report points out that the capacity of steel players is expected to rise again this fiscal year after JSW’s Dolvi plant expansion of 5.6 million tonnes comes on stream. The report says that the higher exports helped counter lacklustre domestic demand for large steel makers (especially in the closing quarter of last fiscal 2021 and the first quarter of the current fiscal). Steel players also gained domestic market share, especially in the long-steel space. Consequently, they operated at more than 80 per cent utilisation levels as against sub-optimum levels of 62 per cent by mid-sized and small steel makers.
Apparently, one of the greatest beneficiaries of a rise in steel prices has been SAIL, one of the largest steelmakers in the country. Its 4Q FY21 EBITDA grew 21 per cent QoQ, despite a wage revision impact. In the absence of significant capex, net debt declined further to Rs 366 billion (versus Rs 538 billion in March’20). As per a report by Motilal Oswal with steel prices at a record high, SAIL is poised to post its best ever EBITDA of Rs 20,000 in the 1Q FY22. Experts at Motilal Oswal expect that due to the high steel prices there could be a further Rs 102 billion fall in net debt to reach around Rs 265 billion for FY22 for the steel maker.
