Steel Companies Operating Margins Decline

Operating margins of primary steel companies are set to decline by two percentage points to 15 per cent this fiscal on back of lower sales volume and realisation, said a Crisil Research study. However, steel companies are better off than in the previous downturn faced in FY’16 due to levy of anti-dumping duty and resolution of stressed assets helping to shore up debt metrics. The percentage fall in sales volume is likely to be in high single digit this fiscal mainly because domestic demand evaporated in the first quarter following the Covid-induced lockdowns. A likely recovery during the rest of this fiscal due to pent-up demand, government spending on rural housing and roads, and growth in lower-margin exports – may not be enough to offset the first-quarter blow. Operating margins had hit a decadal low of 9 per cent during the previous steel sector downturn of FY’16. This time around, domestic steel makers get support from the anti-dumping duty, which sets a floor price for steel imports from China, South Korea and Vietnam, among others. Consequently, domestic prices this fiscal would be 25 per cent higher and aggregate industry operating profit nearly twice that in fiscal 2016.  Moreover, steelmakers are likely to defer nearly half of their planned capex this fiscal and conserve cash to fortify financials.