Steel and Non-Ferrous Sector Outlook for Q3 FY25: Positive Demand and Improved Margins

According to a report by Centrum, steel companies are expected to witness improved demand and better margins in the upcoming Q3 FY25. This positive outlook is driven by a variety of factors, including an increase in long steel prices, a stable flat steel price environment, and a decline in coking coal prices.

Steel Sector: Strong Demand and Profitability

For steel companies, the outlook for Q3 FY25 appears favorable, with the monsoon season receding and demand picking up. Long steel prices have seen a noticeable uptick, providing an opportunity for steel producers to benefit from higher profitability. However, flat steel prices have remained stable, which offers some consistency in the sector's performance.

The anticipated decline in coking coal prices by US$ 25/tonne (approximately Rs. 2,110/tonne) is also expected to contribute positively to margins. This decrease in raw material costs, combined with rising long steel prices, will likely result in better overall profitability for steel companies in Q3 FY25.

Despite this positive outlook, steel companies are also grappling with a rise in net debt. The net debt for steel companies increased by 6-20% in Q2 FY25, primarily due to ongoing capital expenditure (capex) expansion. This increase in debt is linked to the industry’s focus on scaling operations, investing in infrastructure, and modernizing facilities to meet growing demand.

Non-Ferrous Sector: Higher Earnings Expected

In the non-ferrous sector, earnings were boosted in recent months due to a better product mix and lower costs, despite a decline in base metals prices during Q4 2022-23. For instance, the average LME (London Metal Exchange) aluminium price fell by 5.5% QoQ to US$ 2,382/tonne (Rs. 2,01,040.80/tonne), while zinc prices dropped by 2% QoQ to US$ 2,779/tonne (Rs. 2,34,547.60/tonne). Despite this, the non-ferrous companies benefited from a strong product mix, leading to overall positive performance.

Looking ahead to Q3 FY25, aluminium and zinc prices are expected to rise, providing a positive earnings impact for non-ferrous companies. This rise in prices, especially for metals such as aluminium and zinc, will likely support improved profitability in the non-ferrous sector, counteracting the challenges seen in recent quarters.

Ferrous Companies: Challenges Amid Declining Prices

For ferrous companies, the performance has been more challenging. In Q2 FY25, these companies experienced a 3% decline in EBITDA primarily due to the sharp fall in steel realization. However, the decline in raw material prices, especially coking coal, partially offset these impacts. Ferrous steel producers have faced difficulties in maintaining profitability due to fluctuating raw material prices. Domestic steel producers saw EBITDA losses ranging from US$ 8.29-20.14/tonne (Rs. 700-1,700 per tonne), largely driven by a drop in coking coal prices by US$ 25-30/tonne (Rs. 2,110-2,532/tonne).

The coking coal market has played a significant role in shaping the profitability of steel companies in India. As coking coal prices continue to fluctuate, the ability of ferrous companies to manage costs effectively will remain a key challenge in the coming quarters.

Conclusion: Positive Outlook for Steel and Non-Ferrous Sectors

While steel companies face certain challenges, such as rising net debt and EBITDA declines, the positive demand outlook and expected price increases in long steel provide reasons for optimism. The decline in coking coal prices is another favorable factor that could help steel companies achieve better margins moving forward.

In the non-ferrous sector, the outlook is similarly positive, with aluminium and zinc prices expected to rise, leading to improved earnings. As global metal prices shift, non-ferrous companies are positioned to benefit from a stronger product mix and cost management strategies.

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