Indian primary steel makers are expected to hold operating profits between Rs 10,500-11,000 per tonne this fiscal year. While production costs are climbing by Rs 2,000 per tonne due to expensive coal and logistics, higher steel prices and an 11.5% import duty are helping companies maintain their margins.
Primary steel manufacturers in India are successfully navigating a period of rising expenses by balancing them against strong domestic demand and price adjustments. Recent data indicates that steel producers are likely to maintain their operating profitability, or EBITDA per tonne, in the range of Rs 10,500 to Rs 11,000 for the current fiscal year. This stability is notable given that production costs have increased by approximately Rs 2,000 per tonne, pushing the average cost of production to between Rs 53,000 and Rs 54,000 per tonne.
Factors Driving Costs and Prices
The increase in production costs is largely driven by higher prices for coking coal, which is a major raw material. Additionally, companies are facing pressure from rising expenses in logistics, energy, and shipping. However, these rising costs are being offset by a mix of two factors. First, global steel prices have remained supportive. Second, the government’s 11.5% safeguard duty on certain flat steel imports has provided a protective shield, allowing domestic producers to raise their selling prices by 6-8% this fiscal year.
Growth and Expansion Plans
The industry is also benefiting from steady demand. Domestic steel consumption is projected to grow by 5-7% this fiscal year, supported by ongoing infrastructure projects and consistent demand from sectors like automotive and engineering. To capture this long-term growth, major steel companies are in the middle of a massive expansion phase. Top players in the industry are expected to spend at least Rs 75,000 crore on capital expenditure (capex) in the current fiscal year to increase their production capacity.
What Investors Should Monitor
While the outlook for profitability remains steady, investors should be mindful of the risks associated with this heavy investment cycle. A significant portion of this massive capital spending is being funded through debt, which can increase the debt burden on company balance sheets and impact financial flexibility. The ability of companies to manage this leverage while interest rates remain a factor will be a key area to watch.
Furthermore, the steel sector faces the constant risk of imports, particularly from countries where domestic demand is weak, leading to potential dumping of low-cost steel into the Indian market. While current duties provide some relief, any shift in global trade policies or a sudden decline in global steel prices could put pressure on domestic margins. Recent results from major players, such as Tata Steel, have shown resilience, but the performance of overseas operations and the impact of fluctuating freight costs due to global geopolitical tensions remain important variables. The primary monitorables for the coming quarters will be the execution of these large capacity expansion projects, debt levels, and the actual trend of steel imports.