Commodity prices may be range bound in ‘23: JSW CFO
JSW Steel Ltd’s net profit plunged 90% in the December quarter from a year earlier, and the earnings also trailed analysts’ expectations. However, Seshagiri Rao, joint managing director and group chief financial officer, said a sequential analysis would do more justice to the financial performance.
“The results have to be seen in the context of Q3 versus Q2, rather than year-on-year because last fiscal year was an aberration,” he said in an interview. “Last year, steel prices were very high, and raw material price increase took some time to catch up, resulting in exceptionally robust margins posted by steel companies. However, the current year saw steel price corrections post-May, and margins also got normalized.”
“We have booked inventory losses in Q1 and Q2 of this fiscal year, and added to that, the rupee has depreciated from 75 to 82 to a dollar. Therefore, a quarter-on-quarter comparison will be appropriate,” he added.
After reporting a loss of ₹915 crore in the September quarter, the company posted a net profit of ₹474 crore in Q3 compared to ₹4,516 crore a year earlier. “It is a big turnaround with a swing of almost ₹1,400 crore,” Rao said.
The sequential rise was helped by the highest-ever production for JSW Steel, besides a bigger share of business in the automotive sector at 33% on the back of record domestic vehicle sales. Steel dispatches to makers of tinplate, appliances, and wind and solar energy have also increased.
Nevertheless, despite good domestic volumes, JSW Steel’s inventories rose to 180,000 tonnes in Q3, primarily due to a steep drop in exports, which fell by 32% and accounted for 7% of production. Consequently, total sales volume was lower by 2% sequentially.
Rao said JSW Steel’s financial turnaround on a sequential basis was made possible by a reduction in costs by ₹7,900 per tonne, which improved earnings before interest, taxes, depreciation and amortization (Ebitda) per tonne from ₹3,460 in Q2 to ₹8,150 in Q3. The performance of its units also improved compared to Q2 from ₹10 crore to ₹517 crore, resulting in consolidated Ebitda rising to ₹4,547 crore, he added.
Rao expects steel demand to stay robust in Q4, as is normally the case in the last quarter of a financial year. The auto sector typically sees an uptick in sales in Q4, compared to Q3, and state governments also have more budgets. That apart, higher agriculture-related capex and increased activities for residential real estate would result in more demand for construction equipment as well as compressors, textile machinery, paper machinery, and wagon and locomotive manufacturing, which will boost demand for steel, he added.
Steel demand in Q3 was 30 million tonnes, which Rao expects to grow by two million tonnes in Q4, taking total demand to 118 mt for FY23, up 11%.
Exports may also improve due to the rollback of duty in November and the easing of covid policy in China, resulting in the restocking of material globally.
“Prices have become attractive for exports, and removal of export duty will help us compete in international markets,” Rao said. Indian steel prices are at a 6% discount to imports, which may lead to price hikes for domestic steel.
Rao, however, said commodity prices would remain range bound in 2023. “The rate hike cycle in the global economy is likely to continue though the pace may reduce. Inflation in Europe and the US is very high, and inflation targeting remains at 2%. Debt-to-GDP ratio in many countries is also very high, and so we are not very optimistic about global demand recovery,” said Rao.
The only area for all the triggers is from China opening up. “Commentary coming is that the Chinese government is more focused on consumption-led growth than investment-led growth. Prices have improved in China and Europe, in the US, too, compared to November; however, they are still down from the highs in March-April,” Rao added.
With raw material prices rising from the lows in November, Rao said coal and iron ore prices would not sustain. Most steel companies have announced capex and expansion plans to meet demand in the domestic market. JSW Steel, too, is increasing capacity by 10mt. Out of the capex allocation of ₹49,000 crore, ₹15,000 crore will be spent in FY23, and ₹34,000 crore over the next two years, said Rao.
Meanwhile, JSW Steel is scouting for more iron ore mines and will participate in auctions. It is investing in iron ore beneficiation plants in Odisha and slurry pipelines to cut the cost of transportation to ports. Rao said JSW Steel’s units would perform better in the March quarter. He said carrying forward of coking coal inventory from Q3 to Q4 will ensure that there won’t be any impact of the current spike in coking coal prices.