Markets

Challenging times for steel producers

Adarsh Gopalakrishnan | Updated on February 17, 2011

steel

A solid set of third quarter numbers in the ongoing fiscal may not reflect the challenging environment for steel producers such as SAIL, Tata Steel and JSW Steel.

Rising raw material costs, which these companies have been only partially able to pass on to consumers, eroded profit margins across the steel sector compared to the preceding quarter.

SALES AND DOMESTIC PROFITS

SAIL, Tata Steel (standalone) and JSW saw sales rise by 15, 16 and 24 per cent respectively compared to the same quarter last year. This was a result of higher realisations across steel products and rising volumes which were up 4-11 per cent.

Profitability at SAIL and JSW over the same period dipped 34 and 26 per cent respectively as the company's raw material costs were up 38 and 40 per cent.

Steel producers have been unable to effect price hikes to keep pace with iron ore and coking coal quarterly price hikes. Indian steel demand is estimated to have grown about 7.5 per cent in 2010 compared to the preceding year, while prices were up 15-30 per cent over the same period.

However, a beneficiary of the steel price hikes is Tata Steel whose integrated domestic operations have enabled the company to profit from the improved realisations. Tata Steel's standalone net profits witnessed strong growth of 27 per cent. This proved to be a crucial counter-balance to the vulnerable European operations which had a lethargic quarter as deliveries and realisations slipped.

Tata Steel's consolidated sales grew 10 per cent even as sales volumes dipped around 6 per cent, thanks to its relatively lucrative product-mix.

Going by governmental and other reports there, this trend of lumpy volumes is likely to continue into the current quarter as Europe grapples with lower private consumption and capital expenditure.

Coking coal prices are estimated to have risen around 30 per cent since the start of 2011 as a result of the floods in Australia. This is likely to pose a very challenging pricing environment for steel producers for whom price hikes may come at the cost of sales volumes or import threats. JSW Steel which is reliant on external sources for over 80 per cent of iron ore (even higher with the addition of Ispat) will be troubled by the fact that iron ore spot prices are up 12 per cent so far this year.

Published on February 16, 2011

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