keywords :
Sanctions on Russia, following its invasion of Ukraine, will push up input cost for domestic steel companies for a while till raw material trade flows readjust. The disruptions, however, will also lead to export opportunities for Indian steel makers, rating agency Icra said in a research note.
Being the fifth largest coal producer globally, Russia accounted for 10% and 17% of international trade in metallurgical and thermal coals respectively in calendar year (CY) 2020.
Since the start of FY22, international coal prices have surged, with spot prices of premium hard coking coal (FoB Australia basis) and high-grade thermal coal (FoB South Africa basis) rising 300% and 125%, respectively.
Elevated coal costs have started to nibble at the margins of listed steelmakers from Q3 FY22, as earnings trended downwards from the high watermark of Q2, Icra said.
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 steelmaking raw materials, would lead to heightened input cost pressures for Indian steel companies, the ratings agency added.
“After reporting a steep 65-70% sequential increase in cost of coking coal in Q3 FY2022, a further increase of 15% QoQ is expected in the fourth quarter. Though 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,” said Jayanta Roy, senior vice-president & group head, corporate sector Ratings, Icra, said.
“The ongoing conflict in Eastern Europe could further exert input cost pressures on domestic steel mills, which 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% in the current quarter, and the industry’s fourth quarter earnings would be lower than Q3 FY2022 level. 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 said.
Apart from supplying several steelmaking raw materials, Russia and Ukraine are the 5th and 12th largest steelmakers in the world respectively, cumulatively accounting for around 10% of the global steel trade. Around 45% of the steel production from Russia and around 75% from Ukraine are exported to other nations. This, Icra said, 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 their capacity utilisation levels.