Indian mills' Jul-Sep'23 margins to be a mixed bag

• BF mills to offset price falls with lower coking coal costs
  
  
• Flats offer better margin buffer over longs amid lesser price drop
  
  
• IF mills to be impacted by firm raw material prices
  
  
• Higher coking coal costs to impact margins in Q3
  
  

India's tier-1 mills are set to unveil their second quarter (Q2) report cards soon. Markets and investors await these results eagerly, particularly eager to know which way the Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) graph will go.

SteelMint went behind the scene to do some crystal-gazing. It is being deduced that tier-1 mills which have a larger component of flat products in their portfolio will see a higher EBITDA compared to those with a larger share of longs. The reason mainly lies in the price movements in flats and longs on a q-o-q basis. Prices of both flats and longs decreased in Q2 (July-September, 2023) at the tier-1 mill level. However, the fall in longs prices in Q2 was a much sharper INR 3,000-3,500/t ($36-42/t) compared to flats, which fell a more moderate INR 1,000/t ($12/t).

Mills say they have been able to offset the price fall and protect their EBITDA per tonne by the lower coking coal prices, which reduced their cost of production somewhat. But, since the price fall in flats was lesser, they are reaping better benefit from the fall in coking coal prices in Q2 compared to those with a greater exposure to longs.

Steel mills in the last investors call mentioned that coking coal prices in Q2 will translate into a reduction in cost of production by $45-50/tonne (t) or over INR 3,500/t. It may be mentioned that coking coal expenses get integrated into the cost of production with a lag of 3-4 months, including voyage time etc and mills always keep some stocks as buffer. So even if coking coal prices averaged $276/t CFR India in Q2, these were lower at $261/t CFR in Q1 (April-June, 2023) but much higher at $357/t in Q4FY23. Thus, the lower cost benefit of Q1 percolated down to Q2's cost of production.

Domestic iron ore prices also dropped q-o-q but moderately. For instance, the Odisha fines index for Fe62% averaged INR 4,600/t ($55/t) in Q2 against INR 5,510/t ($66/t) in Q1, indicating that it will be majorly coking coal that will impact mills' cost of production more sharply in Q2.

Induction furnace mills EBITDA to be impacted

Where the induction furnace mills are concerned, their EBITDA will take a harder hit because, for one, this segment is predominantly longs-based. Secondly, rebar prices here saw an INR 4,000/t ($48/t) correction q-o-q. For instance, IF-grade rebar prices fell to INR 49,300/t ($593/t) in Q2 compared to INR 53,000/t ($637/t) in Q1.

But, importantly, their cost of production, unlike with BF-route mills, did not decrease in Q2 because of firm raw material prices. Pellet-based sponge iron prices averaged INR 28,900/t ($348/t) in Q2 against INR 28,800/t ($347/t) in Q1. Q2 domestic scrap averaged INR 35,500/t ($427/t) against INR 37,540/t ($451/t) in Q1 but imported scrap ruled at $423/t CNF and $444/t respectively. Thermal coal prices too ruled quite firm. Q2 Gangavaram portside prices averaged INR 9,600/t ($116/t) compared to INR 10,150/t ($122/t) in Q1.

Steel consumption rises q-o-q in Q2 on restocking demand

Despite the drop in exports and monsoon rains, India's steel consumption rose nearly 15% in Q2 to 32 mnt (28 mnt in Q1). Q2 flats consumption was 26% higher q-o-q at 15 mnt (12 mnt in Q1). Longs were up a much lesser 9% in this period to 17 mnt (15 mnt). The higher consumption can be pinned to the considerable restocking that took place around July-August, at the trade and OEM levels, in apprehension of price increase September onwards. In July-August, rebars ruled at around INR 51,000/t ($614/t) before spurting to INR 57,000/t ($685/t) levels in September. In HRCs too, the tags hovered at INR 55,500-56,000/t ($667-673/t) in July-August, before moving up to around INR 58,000/t ($697/t) last month.

Currently, the trade and buyer-level segments are well-stocked and see little reason to procure, resorting to only need-based purchases.

Outlook

Since coking coal prices have started moving up from August onwards, their impact is likely to be felt in Q3 (October-December, 2023). This will obviously increase the cost of production for the larger mills and which will be reflected in prices.

Volumes will be relatively better because Q3 and Q4 (January-March, 2024) will be peak demand season in India. Those segments (trade and projects) holding inventory may liquidate the same by end-November and look to procure afresh December onwards.