(SMM Analysis) Higher Steel Realizations Offset Lower Production for SAIL in Q1 Despite Elevated Coking Coal Costs

Higher domestic steel prices helped offset lower production and elevated raw material costs for Steel Authority of India Ltd. (SAIL) in the April-June quarter of FY2026-27, as the state-owned steelmaker reported stronger profitability despite planned maintenance shutdowns across several plants. The quarter highlighted the importance of higher steel realizations, an improved product mix and additional earnings from iron ore sales in supporting margins, even as crude steel output and sales volumes declined.

SAIL reported revenue from operations of INR262.46 billion ($3.02 billion) in Q1 FY2026-27, while EBITDA increased 49% year on year to INR43.56 billion ($501 million), lifting the EBITDA margin to 16.7%. Profit after tax rose to INR16.36 billion ($188 million), compared with INR6.85 billion ($79 million) in the corresponding quarter last year. EBITDA per tonne improved to INR10,464/mt ($120/mt), reflecting the combined impact of stronger steel prices and improved operating performance.

Higher realizations more than offset lower volumes

The quarter demonstrated that steel pricing had a greater influence on earnings than production volumes.

SAIL's average net steel realization increased to around INR57,150/mt ($657/mt), approximately INR5,000/mt ($57/mt)higher than the previous quarter. Although crude steel production and finished steel sales both declined, the improvement in average selling prices more than compensated for lower dispatches.

The company also increased the share of finished steel in its production mix. Finished steel accounted for approximately 89% of output during the quarter, compared with 86% a year earlier, while a larger proportion of semi-finished steel was converted into higher-value finished products through internal and external rolling facilities.

Management expects steel realizations to moderate during the current quarter as construction activity slows during the monsoon season. Average realizations are expected to decline by around INR1,000-2,000/mt ($11-23/mt), with long products likely to experience greater pricing pressure than flat products.

July realizations had already eased to around INR55,600/mt ($639/mt), although management noted that the spread between primary and secondary TMT bar prices has narrowed to around INR5,000/mt ($57/mt), a level it considers supportive for integrated producers.

Maintenance shutdowns reduced production, not demand

SAIL's lower steel production during the quarter primarily reflected planned maintenance activities rather than weaker market conditions.

The company advanced major capital repairs at IISCO Steel Plant, Bokaro Steel Plant and Durgapur Steel Plant during Q1, resulting in crude steel production of around 4.8 million mt and finished steel sales of approximately 4.2 million mt.

Management maintained its production guidance for the full financial year and expects output to recover as maintenance work concludes over the coming quarters.

Finished steel inventories increased by around 200,000 mt during Q1. The company expects inventory levels to stabilize during Q2 before declining in the second half of the financial year as production normalizes and dispatches improve.

Imported coking coal continued to pressure margins

While stronger steel prices supported profitability, imported coking coal remained the largest cost headwind during the quarter.

SAIL's average imported coking coal consumption cost increased to around INR21,300/mt ($245/mt), compared with approximately INR18,100/mt ($208/mt) in the previous quarter, reflecting the lagged impact of earlier increases in international coking coal prices. Imported coal continued to account for roughly 85% of the company's total coking coal consumption.

Higher fuel and limestone costs also increased production expenses as supply chains were affected by geopolitical tensions in West Asia.

Management expects raw material costs to become more favorable during the current quarter. Based on lower seaborne coking coal prices, average procurement costs are expected to decline by around INR1,200-1,500/mt ($14-17/mt) during Q2, with monthly costs anticipated to soften progressively from August.

SAIL is also progressing development of its Tasra captive coking coal mine, which is expected to commence production from December 2026. Increased captive coal availability is expected to strengthen raw material security and reduce procurement costs over the medium term.

Iron ore sales provided an additional earnings contribution

Besides steel operations, higher iron ore sales also supported SAIL's quarterly earnings.

The company sold around 1.1 million mt of iron ore and mine products during Q1 FY2026-27, compared with 310,000 mt in the corresponding quarter last year.

Revenue from iron ore sales increased to INR5.74 billion ($66 million) from INR1.57 billion ($18 million), contributing around INR1.5 billion ($17 million) to EBITDA.

Management plans to increase iron ore sales to as much as 8 million mt during FY2026-27, compared with around 3.5 million mt in the previous financial year, through continued auctions of fresh fines and tailings from mines in Odisha, Jharkhand and Chhattisgarh.

The additional contribution from mining operations helped partly offset higher steelmaking costs during the quarter and provided another source of earnings beyond finished steel sales.

Expansion remains focused on value-added steel

SAIL invested INR25.75 billion ($296 million) in capital expenditure during the quarter and maintained its FY2026-27 capex target of INR150 billion ($1.72 billion).

Among the key downstream projects is a new 800,000-900,000 mt/year TMT bar mill at Durgapur Steel Plant, scheduled for commissioning between September and December 2027. The project is expected to increase the conversion of semi-finished steel into higher-value finished products.

Management also reiterated its target of reducing production costs by around INR2,000-3,000/mt ($23-34/mt) during FY2026-27 through improved plant utilization, operational efficiencies and tighter cost management.

Additional cost improvements are expected once expansion projects at IISCO Steel Plant are completed later this decade, supported by lower coke consumption, improved fuel efficiency and higher productivity.