Steel companies' margins may decline in the first half of this year due to their limitation in passing on the cost increase on the back of higher contract prices for key raw materials.

While the non-integrated steel producers are likely to be hit by increase in both iron ore and coking coal prices, the integrated steel producers such as SAIL and Tata Steel are partially insulated on the iron ore front.

After pushing up steel prices in January and February, steel companies had to settle for a moderate price hike in March due to lower demand from the end user industry, said Ms Revati Kasture, Head, Industry Research, Care Research.

While the domestic steel demand had registered a healthy growth of about 10 per cent in the first eight months of FY11, the year-on-year slowdown in the IIP (Index of Industrial Production) growth, mainly in the manufacturing and the capital goods sector, has restricted further increase in steel prices, she added.

The cumulative standalone profit margin (net profit/net sales) of top steel companies Tata Steel, SAIL, JSW Steel, Ispat Industries and Bhushan Steel has shrunk to 12.2 per cent in last three quarters of this fiscal from 13.2 per cent in the same period last year.

The average cost for the domestic non-integrated steel producers has increased by about $160 a tonne in FY11 compared to the previous year, according to Care Research estimates.

The percentage increase in the cost of production was about 34 per cent, while finished steel prices have gone up 24 per cent. However, in absolute terms, the rise in prices of finished steel products in comparison with the increase in raw material prices was almost similar, though with a time lag.

With all the major steel producing countries recording a double digit growth rate, global steel output registered a strong growth rate of about 15 per cent in 2010 over the previous year. The growth in steel production led to a robust demand for raw materials such as iron ore and coking coal.

“This combined with concerns on the supply side emanating from the recent floods in Australia, led to an incisive increase in the prices of iron ore and coking coal. The recent increase in steel prices is only a culmination of an increase in the raw material cost especially iron ore and coking coal,” said Ms Kasture.

Going ahead, growth in demand from the domestic user industry and the international steel prices will remain the key indicators for any further increase in steel prices, she added.

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