EPC contractors to seek fixed-price contracts from steel companies

24 Jul 2021 CW Team

To protect themselves from the volatility of steel prices, a few highway Engineering, Procurement, and Construction (EPC) companies have begun negotiating fixed-price annual contracts with domestic steel companies.

Concerned about rising raw material costs, some have asked the Ministry of Road Transport and Highway (MoRTH) to consider including cost escalation clauses in projects awarded before FY21, according to India Ratings.

In FY21, average domestic steel prices increased by 26% y-o-y, and by 23.5 % in Q1 FY21. Prices peaked at Rs 56,000 per million tonne (mt) in May 2021 before falling to Rs 52,000 per mt in June 2021.

The EPC sector is concerned about the rise in steel prices, which has already seen a 10-12% drop in earnings before interest, taxes, depreciation, and amortisation (Ebitda) in the previous fiscal year, owing to a drop in revenue combined with an increase in manpower management costs and commodity prices.

According to the rating agency, EPC players with a large number of uncompleted orders before FY21 and low ratings are more vulnerable to steel price fluctuations and may see significant margin erosion, weakening their credit profiles in the short to medium term.

India Ratings said that EPC players typically try to factor in increases in raw material prices in their bids by estimating fluctuations based on historical trends, making them vulnerable to price spikes. The recent rise in steel prices is causing greater concern for players who have a significant amount of unexecuted order book that was awarded prior to FY21.

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Also read: Stressed steel plants bought under IBC witness faster returns: CRISIL

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