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Rating agency ICRA has revised its outlook on the domestic steel to stable from positive, mainly on the account of mounting input costs amid low steel rates. It noted that after two back-to-back years of earnings surge, the steel companies are now staring at a significant decline in earnings over the next 12 months as the industry faces multiple headwinds emanating from trade barriers from export duty on finished steel, unprecedented coal/energy cost pressures, and muted domestic demand growth so far.

According to the report, the industry could therefore be on the way to an accelerated mean reversion as the operating environment becomes far less attractive in the coming months. Such challenges would be accentuated by high inflation and front-loading of policy rate hikes. It said while domestic demand growth forecast for FY23 is kept unchanged at 7-8 percent, the industry's overall operating profits for the fiscal is revised downwards by around 30 percent...as margins get squeezed between lower steel prices and elevated input costs. Consequently, it has revised the sector's outlook to stable from positive. In the current FY23, the operating profits of steel companies are likely to be lower by 40-50 percent over FY22 levels. 

The report further said the steady rise in coking coal costs had started to nibble at the margins of steelmakers even before the export duty was announced. Therefore, the consolidated operating profits per metric tonne for the four leading domestic steelmakers come down by around USD 110/MT in Q4 FY22 compared to USD 326/MT recorded in Q1 FY22. With domestic hot-rolled coil prices correcting by around 9 percent since the imposition of the export duty, and with coking coal consumption costs poised to spike by around 30-35 percent quarter-on-quarter, notwithstanding the correction in domestic iron ore prices, the industry's operating profits are expected to sequentially decline by USD 80-90/MT in Q1 FY2023.