Kotak Institutional Equities, a brokerage firm, anticipates that steel companies will experience short-term margin gains in the second quarter of FY24 due to reduced raw material costs. However, it has cautioned that rising coking coal costs will impact margins by the end of the third quarter, necessitating further increases in steel prices to maintain profitability.

During the quarter, domestic prices for hot-rolled coil (HRC) and rebar increased by 4 percent and 10 percent, driven by growing demand in the construction and infrastructure sectors. Despite stable export prices from China, domestic steel prices are trading at an 8-10 percent premium compared to import parity levels.

Seaborne iron ore and coking coal prices rose by 5 percent and 24 percent, respectively, due to factors such as stability in Chinese steel production, low iron ore inventories, increased coking coal demand in India, and supply constraints from key sources. Kotak suggests that Indian steel manufacturers may be affected by these factors by the end of the third quarter of FY24.

The report indicates a favorable risk-reward outlook for ferrous stocks (steel, iron ore) when compared to base metals (aluminum, zinc producers) due to better growth prospects and margin visibility. Steel companies are expected to benefit from capacity expansion and robust domestic demand, with their margins still at mid-cycle levels, unlike their Chinese counterparts, which are near breakeven.