“Internationally, roughly 12-13 million tons of pig iron exports happen, out of which almost 50% comes from Russia and Ukraine. That got wiped out with the result that pig iron prices in the US moved up from almost about $550-600 to $900 plus. That has come back now to about above $600, about $650 or so,” says
There has been a massive drop in net profit and pressure on margins. While the ductile pipe business is still better, the iron pipe business has done well. The pressure seems to be coming from the pig iron business. The rising raw material costs had an impact on your P&L. Is the worst over?
I think your last statement summarised it very well so yes, I think it was the worst quarter for us in the last several years. Fundamentally, there were two or three factors.
One, the government’s 15% export duty on pig iron and steel, for us meant roughly about Rs 10,000 per ton and between 22nd of May and June if we sold about 40,000 tons that means Rs 40 crore went out from the EBITDA. So that is one.
Secondly, we had all our shutdowns in Q1. That is how it was planned and that meant another Rs 30 crore odd. We had an impact of about Rs 70 crore, which is a one-off thing and would not normally have happened.
The coal prices jumped almost 170% compared to the previous quarter and it has been a massive hit all through for the industry and for us in particular, because of the shutdown but more so also because of the export duty cut.
We have taken it on our chest and moved on. I am sure things will be much better as we move on.
Another way of looking at it is that as your business done this badly in the quarter under review and by your own admission one of the worst in history for you, is it also because you were executing orders which had been placed before the Russian Ukrainian war and that super cycle of commodities?
We have two businesses; the pig iron business got impacted because of the export duty and that is where we had a hit of almost Rs 10,000 per ton in our realisation.
The other one that you are referring to is the ductile iron pipe business where the realisations have been moving up quarter-on-quarter for the last one year or more. But still it is not at the same level where booking prices are.
Let us say our booking prices are over Rs 80,000 per ton but what we are executing is much lower because we have old orders. That gets evened out over a period of time. I am not so worried about the impact of that in Q1 but essentially it was the pig iron business which got hit most.
Also the price of prime hard coking coal from $110 last year reached $670 in March. They are coming down of course. In July, they came down to almost $240. This kind of volatility has never ever been seen. I do not think anybody can manage this as prices went on a rollercoaster from $100 to $670 and then back to $240. It has virtually killed us for Q1.
However, as prices have stabilised now, pig iron prices are also nudging up; the coal prices are softening and that will improve our spreads going forward.
The DI pipe business of course is smooth and a new plant also commissioned. We will have increased volumes but mostly in H2. So we are looking at much more positive behaviour of the business going forward.
What is your outlook about your order book at hand?
With the new plant commissioned, we will have a higher volume from the new plant, to the extent of 50,000-60,000 or maybe 70,000 tons in this year because most of it will come in the second half.
The commissioning has been done but obviously it takes time to ramp up and it is only the first phase of the plant. The second phase of the plant will come in next year.
There is another factor on the pricing and on the slowdown of executable orders. Even though we had orders, because the prices of ductile iron pipe has moved up by almost 60-70% in the last one year, the EPC contractors of the government were under huge pressure to execute these at old prices because the project costs were getting exceeded. So, there was a slowdown of executable orders also.
But the ministry has had a couple of meetings with all of us and hopefully now with things stabilising, we would see much better numbers going forward especially in H2.
Since Q2 is seasonally a weak quarter, we do not expect massive change in this quarter although it will be an improvement on Q1, but H2 is where we will see a significant jump, both in volumes as well as in profitability.
Rise in raw material cost has dented the overall margins. Is the worst of your margin contraction now behind us?
Absolutely, if you look at the spreads between pig iron and coke, last quarter was virtually a negative. We have never seen coke prices being higher than pig iron prices on a sustained basis in any quarter over the last many years. You hardly ever see that.
That was the case so that is why I said quarter one has been absolutely an outlier and we would have been steady had it not been for the export duty because that compressed our pig iron prices by almost Rs 10,000 suddenly. We would have been up by almost Rs 60-70 crore additional EBITDA if the duty was not imposed and if we had not taken the shutdowns.
I think the worst is behind us and you will see much more positive numbers going forward and we are very confident of that.
You have had several representations with the government on the export duty issue. What is your take regarding this export duty because there were reports talking about some sort of rollback? Could that be on the cards?
We have not been making any representation. The government in its wisdom has imposed the export duty and I think in its wisdom, it should consider rolling it back because it is very evident from our results that we are not really making money with this. When you stop exports and if all this volume comes into the domestic market, it will create a problem for all of us – the industry as well as the buyers and the customers. They start waiting and the sentiment goes negative. They stop stocking up and so the demand gets impacted.
I think leaving it to the market forces is the best way. Yes, there will be some aberrations like it happened after the Ukraine war. It was an aberration in the months of March, April and partly in May. But things stabilise on their own, nobody can make supernormal profits for long but by intervening, you create artificial constraints for the market players.
In my opinion rolling back the export duty is always better in the long term. In the short term, the government in its wisdom has done it and I am sure they must be looking at it.
What if the duty stays? As you pointed out, the domestic market would not be able to absorb all the supply?
Internationally, roughly 12-13 million tons of pig iron exports happen, out of which almost 50% comes from Russia and Ukraine. That got wiped out with the result that pig iron prices in the US moved up from almost about $550-600 to $900 plus. That has come back now to about above $600, about $650 or so.
It has come back to normal levels, the raw material prices have also softened and are coming back to normal levels. In any case, the market finds its equilibrium and it is finding its equilibrium now, irrespective of whether you remove those export duties or not. I am sure that things will stabilise.
What happens when you put an export duty suddenly without warning is that it tends to change the sentiment and people stop buying. So demand also gets hit and that is where the concern was.
I think now things should get better irrespective of whether the export duty goes down, up, or whatever! I am sure the government in its wisdom will review it at some stage, but I do not know when.