Price lift for steelmakers
Decadal high domestic steel prices augur well for
large producers
Domestic steel prices defied predictions and ascended through the December quarter as three tailwinds
converged: high global prices, tight domestic supply on account of iron ore shortage, and healthy demand growth.
Taking cue, steel makers have raised the prices of hot-rolled coils (HRC; average monthly price) multiple times since August, rising by as much as Rs 13,800 per to Rs 51,050 per tonne in December (37% on-year growth).
Importantly, despite this material increase, domestic prices are still 6-8% below global landed prices. Put another way, there is room to raise domestic prices further given they move in sync with the world trend.
China HRC f.o.b. (free on board) prices, after plunging to $409 per tonne in April from $499 per tonne in January 2020, rebounded to $647 per tonne between April and December 2020.
Global prices also touched an 8-year high in December on healthy demand and cost push from soaring iron-ore prices. Chinese crude steel production increased 8% in the period, while exports and inventories remained low indicating robust demand growth there.
We expect steel prices to remain high in the January-March 2021 quarter with a sequential price hike of Rs 7,000- 8,500 per tonne. Consequently, flat steel prices are seen 14-15% higher on-year this fiscal.
Domestic flat steel (HRC) prices soar Global HRC prices touch previous peaks
Source: Industry, CRISIL Research
Note: The spider chart depicts monthly price trend for China HRC f.o.b. from January 2010 to December 2020.
Domestic demand recovered to the pre-pandemic (February) 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% on-year.
The demand momentum should continue in January-March. Growth will also be bolstered by the statistical low-base effect of fiscal 2020.
That would limit the contraction in steel demand this fiscal to 9-11%, compared with our previous forecast of a 17- 20% de-growth.
30000 35000 40000 45000 50000 55000
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
Global landed ADD Domestic HRC Rs / tonne Soaring domestic steel
prices are still at a discount to global landed prices
December 2020 witnesses global steel prices rise to levels not seen
in the last 7-8 years
0 100 200 300 400 500 600 700 800
China HR FOB
$ / tonne January 2010 December
2020
January 2011
January 2012
January 2013
January 2014 January January 2015
2016 January
2017 January
2018 January
2019 January
2020 647
657
586
599
Syncing with economic green shoots End-use sector indicators
Note: *Central government capital expenditure for roads, railways, housing; n.a. – not available
Source: Joint Plant Committee, the Ministry of Statistics and Programme Implementation, industry, CRISIL Research
On the raw materials front, domestic iron ore 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 eastern India. The tight supply augured well for domestic iron ore prices, which more than doubled from May-June levels to Rs 4,360 per tonne in December. However, it remains 60-65% cheaper than landed iron ore prices.
Iron ore prices more than doubled in May-December
Source: Ministry of Mines, company reports, industry, CRISIL Research
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 augur well for 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, should see a 550-650 basis points (bps) Ebitda margin expansion this fiscal. In the second quarter, their
-90%
-70%
-50%
-30%
-10%
10%
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 E
Steel demand y-o-y growth
Lockd own impact
Construction picks up as lockdown was
lifted
Improved demand prospects from automobile and white goods industry
Dec-20Dec-20
Growth (y-o-y %)
Jan- 20
Feb- 20
Mar- 20
Apr- 20
May- 20
Jun- 20
Jul- 20
Aug- 20
Sep- 20
Oct- 20
Nov- 20
Dec- 20
Manufacturing PMI
Car production
Capital goods IIP
Capex* n.a. n.a. n.a n.a. n.a.
0 10 20 30
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 E
IO demand IO supply
Supply crunch in iron ore market on delay of operation of auctioned mines MT
2910 2910 2860 2360 1960 2160 2360 2660 2960 3160 3460 4360
1500 2000 2500 3000 3500 4000 4500
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20E
Domestic iron ore prices skyrocket on demand-
supply mismatch
Iron ore prices (NMDC 64% Fe fines) Rs/tonne
Robust bounce-back in margins forged in the second quarter
Source: Company reports, industry, CRISIL Research
Note: Financials for only large private players (JSW Steel, JSPL and Tata Steel)
Given all this, we expect the large steelmakers (excluding the public sector ones) to clock an impressive 800-1000 bps improvement in their Ebitda margins (on-year) in the second half of this fiscal, riding on the tailwinds of a 35%
increase in domestic steel prices, a 30-35% decline in coking coal prices, and surging demand.
Realisation /tonne
RM cost
/tonne Ebitda/tonne Rs / tonne
51,830
Q1 FY20
22,488 11,013
47,618 21,799 8,681
Q2 FY20 42,650 20,917 7,447
Q3 FY20
9,868 17,955
46,589
Q4 FY20
Q1 FY21
6,281 17,712
41,344
Q2 FY21
11,333 18,532
44,148
17%
23% 24% 24%
20%
25.5-26.5%
0%
5%
10%
15%
20%
25%
30%
0 10000 20000 30000 40000 50000 60000
FY16 FY17 FY18 FY19 FY20 FY21P Realisation per tonne Raw material cost per tonne Ebitda margin
Rs/tonne
Analytical contacts
Isha Chaudhary Director
CRISIL Limited D: +91 22 3342 1868 B: +91 22 3342 3000 [email protected]
Koustav Mazumdar Manager
CRISIL Limited D: +91 22 3342 5916 B: +91 22 3342 3000
Sushmita Vazirani Analyst
CRISIL Limited D: +91 22 3342 5916 B: +91 22 3342 3000 [email protected]
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