Softer domestic prices, rising input costs to weigh on steelmakers’ Q3 earnings

ET Intelligence Group: Steelmakers are likely to face sequential decline in profitability for the December quarter due to softening domestic prices and rising input costs. While they benefited from operating leverage and lower iron ore prices, these gains were offset by higher coking coal costs and weaker realisations. On the other hand, non-ferrous metal producers are likely to show improvement in earnings on strong rebound in aluminium, zinc and copper prices.

EBITDA of steel companies is projected to drop 9-21%. The key drag for them is the steep fall in domestic hot-rolled coil (HRC) prices following the expiry of the provisional safeguard duty in November, which was not restored until the end of the December quarter. Average domestic HRC prices declined by 4.5% sequentially to ₹47,200 in the December quarter while primary rebar prices remained flat, according to Motilal Oswal Financial Services. The duty lapse led to elevated imports, exerting pressure on realisations. As a result, the broking firm expects a fall of ₹1,500-2,000 per tonne in realisations with sector EBITDA likely to drop 9% sequentially.

Nuvama Institutional Equities expects EBITDA to decline 10-21% for steelmakers under its coverage. On the cost front, ferrous companies have faced a $3-5 per tonne increase in coking coal costs, as premium hard coking coal prices averaged around $210 per tonne during the quarter.

The situation is expected to change for the better for steel producers in the coming quarters given the reintroduction of the safeguard duty on steel imports on December 31, which has led to an increase in prices. The three-year staggered safeguard duty, starting at 12% in the first year, is expected to enhance pricing power.

“The staggered safeguard duty announcement will provide support to the steel prices. Steel mills have raised prices recently, ahead of the seasonal construction demand,” said Axis Securities in a report.

Non-ferrous metal producers are expected to deliver a strong performance in Q3, supported by a rally in global commodity prices. Zinc, silver and aluminium prices jumped 14%, 43% and 10%, respectively, in US dollar terms during the quarter sequentially, according to Kotak Institutional Equities.

Copper prices at the London Metal Exchange (LME), too, increased by nearly 20% to $12,500 per tonne at the end of the December quarter, driven by expectations of fresh US tariffs on refined metals and supply disruptions across key mining regions such as Chile, Peru and Indonesia. Motilal Oswal Financial Services expects a growth of 5%, 12%, and 18% sequentially in revenue, Ebitda and net profit for non-ferrous companies under its coverage respectively, driven by higher realisations and better volumes.