Steel company profit margins may remain under pressure with a fall in demand and rising operational costs. Major steel producers Tata Steel and JSW Steel reported a fall in net profit in the fourth quarter while SAIL's profits were marginally up.
Steel producers may find it difficult to pass on higher costs, given the subdued demand from end-user industries in the unfavourable macro-economic environment.
Steel prices are expected to come down starting next month as demand for long steel will fall with the onset of the monsoon and consequent slowdown in construction activity. Mr Ashish Upadhyay, Associate Director, Fitch Rating, said steel producers may test the market to increase prices during the festival season beginning October.
“However, the risk of regulatory intervention in prices, given the government's priority to tackle inflation, continues. Despite steel being a deregulated commodity, the government may exert indirect control on steel prices, as seen in the past,” he said.
In May, NMDC, the country largest iron ore supplier, increased prices by 10 per cent. This had pushed up costs by 3-5 per cent for steel-makers. However, SAIL and Tata Steel were not impacted as they have their captive iron ore mines.
Earlier, the Railways increased freight rates for iron ore import by 20 per cent. Freight cost is a significant factor in steel production; for every tonne of steel produced, about four tonnes of raw material is transported.
The positive impact of softer key raw material (iron ore and coking coal) prices globally has been offset by the rupee's depreciation. A weaker rupee will adversely affect the EBITDA (earning before interest, tax, depreciation and amortisation) margins as most steel producers import the bulk of their coking coal requirement.