Karachi, March 06, 2023 (PPI-OT): Long Steel sector fears shortage of raw materials
Long steel industry has been witnessing higher cost pressures as a result of continuous depreciation of the PKR versus the US dollar, rising inflation, and challenges in importing raw materials.
This has led to a noticeable increase in steel rebar prices by manufacturers (CY23TD +Rs85,000/ton, +38%), which has not been sufficient to pass on the impact as steel scrap prices have also increased by around 27% from their recent low of US$339/ton in Nov-2022.
These challenges coupled with low demand were reflected in Mughal Iron and Steel Ltd (MUGHAL) and Amreli Steels Ltd’s (ASTL) 2QFY23 results, as both companies reported lower volumetric sales and lower gross margins.
While near term profits may improve on higher product prices, steel companies are expected to face challenges for a prolonged period. In addition, higher finance costs, which were also reported in 2Q, may continue to pile on to core challenges.
Sector remains under pressure
The long steel sector has been facing a tough situation owing to continued steep depreciation of PKR versus US$, rising inflation and impediments in raw material imports due to LC restrictions. In addition, prices of steel scrap, that accounts for over 60% of a rebar manufacturer’s costs, have also increased by around 27% from its most recent low of US$339/ton in Nov-2022. In efforts to pass on the rising costs, steel rebar producers have been raising prices since the beginning of this year, and have increased prices by roughly Rs85,000/ton (+38% CYTD).
In addition to delayed production over scarcity of imported raw materials, some steel companies have also suffered losses due to demurrage costs on containers carrying steel scrap stuck on ports.
While higher prices may improve gross level performance during March quarter, we believe pressure on steel companies’ profitability from 4QFY23 will likely be pronounced with continuing import restrictions, reiterating our view of dull demand and lower margins taking time for the sector to find favour.
MUGHAL: Both segments show margin decline
MUGHAL posted 2QFY23 EPS at Rs1.4, -74% /-46% on a YoY/QoQ basis. Gross margins clocked in at 7% over lower volumetric sales for both the ferrous and non-ferrous divisions. Similarly, operating margins clocked in at 6%, -9ppt/-7ppt lower YoY/QoQ, whereas finance cost came in higher (~+86% YoY) due to 6.6bp YoY rise in KIBOR resulting in lower profits before tax.
Non-Ferrous segment, which acts as a buffer for the company, also posted lower Gross margins during 2QFY23 at 17%, a 12ppt YoY decline. Mughal’s ferrous division posted 4% Gross margins for the quarter, an 8ppt YoY drop, owing to higher cost scrap material and also because exporters reportedly negated usual discounts to Pakistani importers due to uncertain economic situation of the country.
Moreover, even with a tax reversal of Rs427mn, net margins of the company dropped by 3ppt to 3% on a sequential basis. Ongoing challenges led to the company skipping its usual half yearly dividends.
ASTL: Loss for the quarter despite tax reversal
ASTL posted an LPS of Rs1.3 for the second quarter, versus an EPS of Rs0.7 for 1QFY23. To recall, the company had shut down its plant due to the dull demand scenario during 1QFY23 and had sold from available inventory. Gross margins for the company clocked in at 6% (-10ppt QoQ) due to higher discounts. Company’s performance also dropped on a sequential basis at the operating level with operating margins clocking in at 3% (down 9ppt QoQ). Finance cost of the company was also higher by 119%/11% on a YoY/QoQ basis, again due to the KIBOR rates.
ASTL posted this loss despite of a tax reversal of Rs243mn during the quarter. Cumulatively, company’s loss for 1HFY23 added to Rs185mn (LPS: 0.6) compared to a profit of Rs1.3bn (EPS: 4.4) for 1HFY22.