Mumbai, March 7 : Imposition of sanction on Russia, amid its growing invasion in Ukraine, will put input cost pressures on domestic steel companies, but will also open up export opport ties for them, says ICRA. According to the ratings agency, sanctions on Russia could open new export opport ties for Indian steel mills in geographies like Europe, the Middle East and the US, which could face supply shortages in the near term. Being the fifth largest global coal producer, Russia accounted for 10 per cent and 17 per cent of the international trade in metallurgical and thermal coals, respectively in CY2020. Since the start of FY2022, international coal prices have already rallied quite sharply, with spot prices of premium hard coking coal (FoB Australia basis) and high-grade thermal coal (FoB South Africa basis) increasing by 300 per cent and 125 per cent respectively. Elevated coal costs have started to nibble at the margins of listed steelmakers from Q3 FY2022, as earnings trended downwards from the high watermark of Q2 FY2022, the agency noted. “After reporting a steep 65-70 per cent sequential increase in cost of coking coal in Q3 FY2022, a further increase of 15 per cent quarter-on-quarter is expected in the fourth quarter. Though the price of iron ore has moderated somewhat from the highs of Q3, and domestic mills have announced some steel price hikes from late January 2022, these will not be able to entirely compensate for the steep rise in coking coal costs,” ICRA Senior Vice-President & Group Head, Corporate Sector Ratings Jayanta Roy. He further said the ongoing conflict in Eastern Europe could further exert input cost pressures on domestic steel mills. In addition, Russia is the third largest global producer of nickel, a key raw material used in stainless steel production and, along with Ukraine, Russia is also a leading global exporter of iron ore pellets. Supply disruptions of these key steel-making raw materials, where Russia is a key global supplier, would lead to heightened input cost pressures for Indian steel companies. “This makes us believe that the gross spreads for a primary steel producer, who is dependent on market purchase of raw material, would be sequentially lower by around 15 per cent in the current quarter, and the industry’s fourth quarter earnings would be lower than Q3 FY2022 level,” Roy added. Nevertheless, in absolute terms, the industry’s earnings are expected to remain at healthy levels in the next 12 months, leading us to maintain a positive outlook for the sector, he added. Notwithstanding input cost pressures, industry earnings are expected to remain healthy in the next 12 months; industry outlook maintained as positive domestic steel demand growth pegged at 7-8 per cent in FY2023 on the back of an estimated growth of 11-12 per cent in FY2022, supported by the government’s large infrastructure spending plans. Apart from supplying several steel-making raw materials, Russia and Ukraine are the 5th and 12th largest steelmakers in the world respectively, cumulatively accounting for around 10 per cent of the global steel trade. Around 45 per cent of the steel production from Russia and around 75 per cent from Ukraine are exported to other nations. This could lead to regional steel supply shortages as Russian mills brace for sanctions and Ukrainian steel production gets severely disrupted by the conflict. Therefore, in the export markets, leading Indian steel companies can expect to see some market-share gains if they can further increase their capacity utilisation levels, the agency said. “Reduced market access for Russian steel mills could help Indian steel producers increase footprint in geographies like Europe and the Middle-East, where the C.I.S countries cumulatively exports around 22-23 million tonnes of steel annually. “Indian mills could also vie to have a greater footprint in the US, where Russia is a key supplier, and where the presence of Indian steel companies is fairly limited so far. However, the extent of export would be limited by the already high capacity utilisation levels of leading steel companies in India,” he added. Following the outbreak of the second wave at the start of the current fiscal, and the Omicron outbreak subsequently in November 2021, domestic steel demand recovered from these setbacks and started to register a healthy sequential pick-up from December 2021 as construction activity gathered momentum. Monthly domestic steel consumption crossed 10 million tonne in January 2022, the highest level recorded in the last eleven months. “With the Government making a strong push for infrastructure led growth in the country centered around the Gati Shakti Master Plan in core sectors like railways, roadways, multi-modal logistics parks, and energy, domestic steel demand is expected to grow at a healthy rate of 7-8 per cent in FY2023 on the back of an estimated growth of 11-12 per cent in FY2022 and a contraction of 6 per cent in FY2021,” ICRA added. PSK ING
