India's tier-1 mills' Q2FY'25 performance a mixed bag. Will Q3 fare better?

• Crude steel output up q-o-q, y-o-y for top 3
  
  
• Sales pressured by imports, subdued exports
  
  
• Lower steel prices impact most mills' PAT
  
  
• Higher demand, lower material costs likely in Q3
  
  

Morning Brief: Overall, Indian tier-1 steel mills put up a mixed performance in the second quarter of financial year 2024-25 (Q2FY'25). Crude steel production, sales and EBIDTA differed across mills amid intermittent production cuts, and declined finished and raw material prices.

BigMint goes behind the scene:

Production sees mixed performance q-o-q, y-o-y

Most of the tier 1 mills undertook production cuts in the current fiscal, although not all simultaneously, to balance out the supply-demand matrix.

It was a mixed performance q-o-q and y-o-y, with the top three, namely JSW Steel, Tata Steel and Steel Authority of India (SAIL), able to weather the storm in Q2. The pressure of oversupply in hot rolled coils weighed on production volume. JSW reported the highest increase in crude steel production, up 9% q-o-q and 7% y-o-y because it successfully commissioned a 1 million tonne per annum (mtpa) expansion at Bhushan Power & Steel, increasing its overall capacity to 4.5 mtpa. The company also commissioned a sintering plant at Vijayanagar in March this calendar followed by blast furnace and related facilities in September.

Tata Steel's (which includes standalone and NINL) output was stable q-o-q at 5.28 mnt and up 5% y-o-y, with the second blast furnace at Kalinganagar "progressing well" as per the company.

JSP's output edged down nearly 4% to 1.97 mnt q-o-q although, it was up 4% y-o-y.

Sales see a rough patch y-o-y

Again, the top three fared better q-o-q in terms of sales although these remained range-bound pressured by subdued exports and domestic sales. But y-o-y the performance was in the negative for JSW, SAIL and JSP.

For JSW Steel, a sharp decline in exports due to weak global markets impacted sales. The company achieved its highest quarterly sales to institutional segments, with a 12% increase y-o-y. Sales to the solar segment also saw a significant growth of 50%. Coking coal costs dipped $2/t in this quarter for the company.

At SAIL, sales edged up 2% to 4.10 mnt in Q2FY'25 from 4.01 mnt in the last quarter. However, the same witnessed a 14% drop from 4.77 mnt in Q2FY'24.

For JSP, sales at 1.85 mnt were down 12% from 2.09 mnt in the preceding quarter. Additionally, sales were down by 8% y-o-y from 2.01 mnt in Q2FY'24. During the quarter, infrastructure accounted for the major 40% of JSP's sales. Distribution followed closely, with a 31% share, while the remaining 29% constituted of engineering, building, and automotive segments.

EBIDTA trend mixed amid falling steel, raw material prices

As in Q1, in Q2 too, earnings before interest, taxes and depreciation and amortisation (EBIDTA) were a mixed bag.

Tata Steel's EBITDA per tonne fell 5% q-o-q at INR 13,500/t ($160/t) in Q2FY'25 but was static y-o-y. Steel demand was impacted by the monsoon and lower expenditure by the government due to elections. Coking coal costs were down 14% in this quarter while export volumes rose 21% to 0.23 mnt in Q2FY'25 as compared with 0.19 mnt in the previous quarter. Volumes were up by 15% y-o-y from 0.2 mnt in CPLY.

JSW Steel's EBIDTA/t rose 4% q-o-q to INR 8,750/t ($104/t) but fell a steep 31% y-o-y. During Q2FY'25, net sales realisation (NSR) decreased by over INR 3,000/t ($36/t) q-o-q. Sales of value-added steel products (VASP) were recorded at 60% for the quarter, primarily due to exports falling by 35% y-o-y.

SAIL's EBIDTA/tonne rose 28% q-o-q to INR 7,750/t ($92/t) but fell 9% y-o-y. Coking coal costs were down INR 2,000/t ($24/t) q-o-q.

JSP's declined 15% q-o-q but rose 4% y-o-y to INR 11,450/t, ($136/t). The company's NSR for the quarter stood at INR 54,600/t ($647/t) against INR 55,840/t ($662/t) last quarter. JSP increased prices by INR 1,000-3,000/t ($12-36/t) across its product basket, which is expected to boost its NSR in Q3. On the cost front, coking coal prices decreased by $35/t, while iron ore tags declined by INR 500/t, in line with the guidance.

AM/NS India's EBITDA in Q3CY'24 dropped 32% q-o-q to $162 million from $237 million in previous quarter due to negative price-cost effect while Q3 EBITDA slumped 70% y-o-y on lower steel prices.

The reasons for the patchy EBIDTA performance lay in two factors. One was the steep erosion in domestic prices. For instance, trade-level HRCs, ex-Mumbai, lost 6% q-o-q at INR 50,460/t ($598/t) in Q1 and a steep 15% y-o-y.

BF-route rebar was down 10% q-o-q at INR 51,238/t ($607/t) and 4% y-o-y. IF-route rebars, which heavily influence BF-route prices, fell 11% q-o-q at INR 45, 927/t ($544/t) and 7% y-o-y.

Secondly, raw materials also failed to keep prices supported. The Odisha iron ore fines index (Fe62%) fell 13% q-o-q to INR 4,392/t ($52/t) and 5% y-o-y. Coking coal (premium HCC) was down 13% q-o-q at INR 19,075/t ($226/t) and 17% y-o-y.

Lower steel prices impact profits

Most mills reported a decline in Q2 profits amid lower steel prices, although Tata Steel posted a consolidated PAT of INR 833 crore ($98.72 million) in the quarter under review against a loss of INR 6,196 crore ($734.30 million) in year-ago period. Revenue from operations fell 3% y-o-y to INR 53,905 crore ($6,388 million). Despite the dip in revenue, reduction in expenses by 6.3% supported the profit.

JSW Steel's PAT underscored significant challenges, with an 85% drop to INR 404 crore ($48 million) while revenues were down 11% y-o-y.

JSP reported 38% fall in consolidated PAT to INR 860 crore ($102 million) on account of lower revenues.

SAIL's consolidated net profit declined 31% to INR 897.15 crore ($106 million) for Q2. The company said earnings this financial year have been "impacted by various challenges".

Outlook

Going forward, mills expect reasonably strong demand and further reduction in coking coal and iron ore prices in Q3FY'25. However, global dynamics, especially against the backdrop of escalating geo-political tensions in the Middle East, the persisting Russia-Ukraine war, change of guard in the US White House and China's trade dynamics will all collude to impact the Indian steel sector too.