Steel margins may better in short term; coking coal price hike may hit profit in Q3: Kotak

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During the quarter, domestic HRC and rebar prices surged by 4% and 10%, respectively, driven by increased demand in construction and infrastructure

Brokerage house Kotak Institutional Equities expects short-term margin gains for steel companies in the second quarter of FY24 on the back of lower raw material costs.
It, however, cautioned a rise in cost of coking coal will hit the margins from the end of third quarter this fiscal, which calls for a further hike in steel prices to maintain profitability.

During the quarter, domestic HRC and rebar prices surged 4 percent and 10 percent, driven by increased demand in construction and infrastructure. Despite stable Chinese export offers, domestic steel prices are trading at an 8-10 percent premium to import parity levels.

Seaborne iron ore and coking coal prices gained 5 percent and 24 percent on factors like stability in Chinese steel production, low iron ore inventory, and increased coking coal demand in India, coupled with supply constraints from key sources. This could affect Indian steel makers by the end of the third quarter of FY24, Kotak said in a report.

It suggests a favourable risk-reward outlook for ferrous stocks (steel, iron ore) compared to base metals (aluminum, zinc producers), citing better growth prospects and margin visibility. Steel companies are expected to benefit from capacity expansion and robust domestic demand, while their margins are still at mid-cycle levels, unlike their Chinese counterparts near breakeven.

(Source : Money Control)