Following around five years of anaemic long-steel demand, ICRA expects a strong uptick for long products, stemming from increased infrastructure and construction activity as the country attempts to “build” itself out of a Covid-induced slowdown.
According to a report by ICRA, following the massive construction disruption in Q1 FY2021, infrastructure activity picked up in Q3 FY2021 with pace of execution crossing pre-Covid levels in H2 FY2021. The state government capex, which accounts for 60% of the total capex by the Governments, also picked up sharply from December 2020, adding to the Central Government expenditure.
Further, wave-2 was relatively less disruptive with continued construction activity. ICRA expects the GoI’s announced expenditure plans and the post Covid pent-up demand pick-up in rural and urban construction activity to lead to increased offtake for long products.
The weak demand for long steel in the Indian markets over the past five years (pre-and post-Covid) had impacted smaller steel manufacturers (players using the Electric Arc Furnace (EAF)/Induction Furnace (IF)) more severely than the larger manufacturers (players using the Blast Furnace-Basic Oxygen Furnace (BF-BoF) route). During the Covid period (past 14-18 months), apart from capturing the available demand in the domestic markets, larger players also succeeded in exporting semis, leading to sharply divergent capacity utilisation trends between the larger and smaller players. ICRA expects the demand uptick stemming from the Government’s thrust on infrastructure, apart from the pickup in smaller construction activity to lead to increased offtake from smaller manufacturers in the coming quarters.
A steep steel price rally, coupled with benign coking coal prices (until May 21) led to a sharp increase in contribution margins of large players to all-time highs in FY2021 and Q1 FY2022, improving their credit profiles significantly. On the other hand, with prices of sponge iron, scrap and non-coking coal, raw material used by small and medium players increasing significantly over the same period, smaller player margins were impacted. Moreover, in FY2021, smaller players were also impacted by a shortage of iron ore in the market, which larger integrated players were insulated from to an extent, because of their captive sources.
During the past few weeks, ore prices have been correcting amid better availability in the domestic market and a decline in international prices. Further, since June 2021, international coking coal prices have almost doubled. While large integrated steel manufacturers’ margins will continue to remain insulated from iron ore price movement, to the extent of their captive iron ore availability, the impact of higher coking coal prices will show up in the margins in H2 FY2022, with a lag of about two months for imported coking coal. On the other hand, smaller players would stand to benefit from lower iron ore prices at a time when demand conditions are likely to improve after the ongoing monsoon season. This will lead to narrowing of the margin gap between larger and smaller players.