Russia Ukraine Conflict: Sanctions on Russia due to the attack on Ukraine is going to affect many sectors. These restrictions will increase the input cost for domestic steel companies for some time till the raw material trade changes. According to Mint, rating agency Icra said in a research note, however, that these disruptions will also create export opportunities for Indian steel makers.
Being the fifth largest coal producer globally, Russia had 10% and 17% share of international trade in metallurgical and thermal coal respectively in calendar year (CY) 2020.
Since the start of FY22, international coal prices have increased, with spot prices of premium hard coking coal (FoB Australia basis) and high grade thermal coal (FoB South Africa basis) rising by 300% and 125% respectively .
Icra said higher cost of coal has started weighing down on margins of listed steel makers from Q3 FY22 onwards, as earnings dipped below the high watermark of Q2.
In addition, Russia is the third largest global producer of nickel, a major raw material used in the production of stainless steel, and along with Ukraine, Russia is also a major global exporter of iron ore pellets.
The rating agency said the disruption in the supply of these critical steel making raw materials will add to the cost pressure for Indian steel companies.
Jayanta Roy, Senior Vice President and Group Head, Corporate Sector Ratings, Icra said, “After reporting 65-70% sequential growth in cost of coking coal in Q3 FY2022, a further growth of 15% QoQ is expected in Q4 “
He further added, “Although iron ore prices have moderated somewhat from Q3 highs, and domestic mills have announced some hike in steel prices from end-January 2022, these are sharp increases in coking coal costs.” Will not be able to fully compensate for the increase.”
Jayanta Roy said, “The ongoing conflict in Eastern Europe could lead to increased input cost pressures on domestic steel mills, leading us to believe that the gross spread for a primary steel producer dependent on market procurement of raw materials would be around 15% sequentially. The current quarter, and the industry’s fourth quarter earnings, will be lower than the Q3 FY22 levels.”
Nevertheless, overall, industry earnings are expected to remain at healthy levels over the next 12 months, which should help us maintain a positive outlook for the sector, he adds.
In addition to supplying several steelmaking raw materials, Russia and Ukraine are the 5th and 12th largest steel producers in the world, respectively, which cumulatively account for approximately 10% of the global steel trade.
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