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Steel sector Q3 preview: Street expects EBITDA/tonne to contract by around 10-40% sequentially

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Q3 of FY22 is expected to be a humbling quarter for ferrous companies. It is expected that EBITDA per tonne for most players will contract by around 10 to 40 percent on a sequential basis. Lower volumes are adding to their woes, along with higher input cost.

Q3 of FY22 is expected to be a humbling quarter for ferrous companies and the Street has been reacting to both, the domestic as well as the global data points that have been coming in. Now that is evident from the fact that stock prices have come up by roughly around 15 to 30 percent from the 52-week highs.
The slump in the property market in China, postponement of buying in the domestic steel market as well as anticipation of steel prices coming down, are the reasons why steel offtake has been hurt.
Volumes have been impacted on low sequential exports, as well as subdued pickup in the domestic market. Volume pullback will be the case for most of the steel majors, that is barring JSW Steel because they have commissioned their Dolvi unit that is a 5 million tonne unit that was commissioned in the past quarter. So that is what will help their volume growth a tad bit.
For Tata Steel, the steel exports have come down on a sequential basis by around 250 basis points to around 14 percent.
For JSPL, the company has mentioned in its press release that sales volumes were impacted by limited rake availability as well as unseasonal rains in the past quarter. Profitability will get impacted because of higher raw material costs. Coking coal costs had spiked up, so it could hit by cost by close to around $ 80- $100 per tonne, while blended realisations were up only marginally maybe around Rs 1,500 to around Rs 2,000.
Though lower iron ore prices will help some of those non-integrated players, namely JSPL as well as JSW Steel; This is because Tata as well as SAIL, are getting their iron ore from their own backyards.
Now, EBITDA per tonne for most players will contract by around 10 to 40 percent on a sequential basis. Lower volumes will be adding to their woes, along with higher input cost.
Valuation-wise, there will be some support that will come there because debt reduction continues for most of them in the near-term. On this parameter, SAIL as well as JSPL, valuation-wise they are cheaper than the larger peers. But that has been the case for the past many years.
Now the Street will be tracking the management commentary more than anything on demand revival in the domestic markets. They will also be tracking how the Chinese steel market demand will pan out post the New Year. In January 2022, so far steel prices, while they have been hiked by roughly around Rs 1,000 per tonne, hence sustainability of these price hikes as well as future price hikes need to be tracked closely.
NMDC has been cutting prices so some benefit of lower iron ore cost will benefit some of those non-integrated names as well.
Watch the accompanying video of CNBC-TV18's Nigel D'Souza for details.
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