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Amreli Steel braces for sustained challenges amidst construction downturn in FY24

Amreli Steel (PSX: ASTL) anticipates prolonged challenges in FY24 due to sustained pressure on demand for long steel, particularly rebars, linked to a persistent downturn in the construction sector.

Amreli Steel braces for sustained challenges amidst construction downturn in FY24

Amreli Steel (PSX: ASTL) anticipates prolonged challenges in FY24 due to sustained pressure on demand for long steel, particularly rebars, linked to a persistent downturn in the construction sector. The company faced significant financial difficulties in FY23, reporting losses of approximately Rs 678 million, which continued into the first quarter of FY24 with an additional loss of Rs 173 million. This marked a trend of negative earnings in four out of six quarters since June 2022, resembling the challenging periods of FY19 and FY20. In contrast, Agha Steel, known for its cost efficiency, maintained positive performance during the same period.

Steel manufacturers, relying on imported steel scrap for rebars, are vulnerable to international price fluctuations and currency dynamics. Amreli's gross margins declined, reaching 12 percent in Sep-23, while Agha Steel demonstrated resilience with commendable margins. The construction sector, impacted by economic downturns, saw Amreli's rolling mill capacity utilization drop to 30 percent in FY23, contrasting with Agha's utilization of 41 percent for rebars in FY23.

Despite a 4 percent decline in billet production in 1QFY24, the Large-Scale Manufacturing Index indicated signs of recovery in cement production, raising questions about specific challenges faced by steel rebars, potentially linked to issues like steel smuggling. While private sector investors remain cautious due to construction costs, major projects proceed with delays and cost overruns. As FY24 progresses, Amreli expects sustained demand pressures, leading to compromised capacity utilization, compounded by challenges like energy costs, rupee depreciation, and escalating finance costs, accounting for 9% of revenue in 1QFY24. Improved sales may offer relief, but Amreli Steel acknowledges a challenging road ahead.

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