The steel sector, which had seen its fortunes revive in the last two fiscals, appears to be headed for a sturm und drang phase again.
Disruptions in mines, elevated inventory levels and high bid premiums in the recent auctions in Karnataka pose hiccups on the supply side even as dampeners abound on the demand side, too.
In the context, even the upcoming mine auctions in Odisha are expected to see high bid premiums.
The fallout – a mighty blow to non-integrated steelmakers. Indeed, around 76% of domestic crude steel capacity, which procures from the merchant iron ore market, is expected to be impacted directly.
In a possible scenario of downward rally of global iron ore prices, steelmakers (especially port-based) can potentially consider imports. However, given that domestic prices are typically at a 55-60% discount to imported prices, profitability of non-integrated steelmakers is expected be under pressure in the two fiscals following the Odisha auctions.
That said, improving realisations and declining coal prices should provide some relief.