Despite higher steel prices necessitated by rising raw material costs, the net profits of steel major SAIL fell by 28 per cent for the quarter ended March 2011 compared to the same period a year ago.

While the price hikes did enable the company to absorb part of the 30-40 per cent hike in coking coal prices, the 27 per cent hike in overall raw material costs and higher employee expenses did crimp margins by over 6 percentage points year-on-year to around 22.6 per cent.

The company which depends on imported high grade coal for 70 per cent of its coking coal requirement was impacted by the floods in Queensland, Australia. The floods of January 2011 caused coking coal prices to spike by as much as 40 per cent during the quarter.

The recent results re-affirm the relatively ‘stronger' pricing power position held by global miners compared to steel producers over the last year. Yet, the steel price hikes of between 10 and 20 per cent during the quarter ended March 2011 over the preceding quarter ended December 2010 is a positive indication, suggesting nascent ability of the company to pass on cost hikes.

Consequently, SAIL posted around 7.2 per cent sequential quarter rise in sales, and 36 per cent increase in profits. Operating margins too grew around seven per cent sequentially, aided by a relatively higher degree of integration compared to peers, thanks to its captive iron ore mines.

However the ongoing quarter will be a test of the sustenance of SAIL's pricing power given that the effect of higher coking coal costs may reflect fully only in the coming period.

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