Why the Russia-Ukraine war is a boon as well as bane for Indian steelmakers

The ongoing war in Europe where Russia has attacked Ukraine has led to wide ranging sanctions being imposed by the Western world on the former flagbearer of the Soviet bloc.

Even as India has maintained a tightrope over the flashpoint given its historical ties with Russia, it has been under pressure to condemn the move over humanitarian aspect of the attack. On the flip side, the war has also created ripples in the business circles.

In particular, sanctions on Russia could open new export opportunities for Indian steel mills in geographies like Europe, the Middle East and the USA. However, steelmakers could also simultaneously experience input cost pressures in the near term as Russia remains a key supplier of many steel-making raw materials.

Elevated coking coal costs had started to nibble at the margins of primary steel makers from Q3FY22, as earnings trended downwards from the high-watermark of Q2. To partly absorb these input cost pressures, domestic steel mills announced price hikes in February, helped by a sequential uptick in domestic steel demand.

The Russia-Ukraine conflict is likely to keep input costs at elevated levels for some time till raw material trade flows readjust following the imposition of sanctions on Russia, according to rating agency ICRA.

Notwithstanding input cost pressures, industry earnings are expected to remain healthy in the next 12 months.

But there is limited visibility of the upcycle sustaining beyond FY23 in the base case. A sharper-than-expected rise in US Federal Reserve’s policy rates, a further escalation of the Russia-Ukraine war, or a significant deterioration of the Chinese housing sector remain key downside risks to baseline estimates.

Meanwhile, the domestic steel industry capacity utilisation level is poised to touch 80% in the coming year, after a gap of eight years and domestic steelmakers have announced large capacity expansions cumulating to around 40 million tonnes per annum to be commissioned over the next four years.

Domestic steel demand sequentially rebounded since December 2021 as construction activity gained momentum. Growth is pegged at 11-12% in FY2022 and 7-8% in FY23, supported by the government’s large infrastructure spending plans, ICRA said.

Given two back-to-back years of strong performance, the steel industry’s consolidated borrowings are today at their lowest levels since March 2011. The industry’s credit metrics, therefore, recorded a significant improvement, with total debt/OPBITDA reducing from 4.4 times in FY20 to around 1 time in FY22.

While this provides some comfort, investors should keep an eye on the how the companies are navigating the input cost rise and whether they are able to pass it on to the buyers, the ratings firm said.