Amreli Steel (PSX: ASTL) expects demand for longsteel (rebars and like) to remain under pressure during FY24, as told in its Corporate Briefing. This does not come out of the blue—demand has been shaky within construction since last year which has carried forward through the first quarter of the current fiscal year, and rebar makers have suffered as a consequence. Amreli has suffered more.

In fact, the company incurred losses of roughly Rs 678 million during FY23, and during the first quarter of FY24, Amreli incurred another loss of Rs173 million. Since the Jun-22, the company saw negative earnings in four out of six quarters. This is very similar to FY19 and FY20 when its earnings plummeted into the red zone. By comparison, its newly listed peer Agha steel that boasts about its curtailed costs due to the efficiency of its technology has continued to remain positively afloat throughout this time. This is not to say Agha steel has performed phenomenally well in a tanking economy; it hasn’t. But it has performed phenomenally better than others.

Steel makers are typically importing steel scrap to make billets that are then rolled into reinforcing bars (or rebars). This makes them sensitive not only to the changes in scrap prices internationally, but to rupee-dollar parity, and to shifting freight costs. While domestic policies to suppress/ration imports have been ongoing, steel makers also have had to contend with substantially subdued demand and rising scrap prices. Amreli’s quarterly gross margins have declined from 18 percent in Mar-23 to 13 percent in Jun-23 and 12 percent in Sep-23. Agha reserves all the bragging rights for suitably high margins in the business which it owes to production efficiencies and its investment in the right technology.

Construction demand has been a victim to the worsening economic conditions. Amreli’s capacity utilization for its rolling mills in FY23 fell to about 30 percent which is a mighty fall from FY22’s 60 percent. Agha’s comparative capacity utilization was 41 percent for rebars in FY23 and 68 percent in FY22. According to the Large-Scale Manufacturing Index, in 1QFY24 (i.e. the period of Jul-23 to Sep-23), billet production is down 4 percent from last year. Curiously, cement production has grown, showing signs of recovery, which begs the question why steel rebars are fighting a tougher battle. One reason is possibly smuggling of steel through porous borders filling up the demand needed in a market that is already slow to recovery. Construction costs have kept private sector investors at a distance for now, but most large-scale construction projects are operating as planned, though many have been delayed and reporting cost overruns.

There is no question that FY24 will see continued demand pressures and as a result, compromised capacity utilization, but Amreli’s problems are also related to its energy costs, rupee depreciation and its burgeoning finance costs (1QFY24: 9% of revenue) which are pretty steep. Improved sales may help, but just.