The high raw material cost coupled with increasing operational cost may exert pressure on steel company margins in the third quarter of this fiscal.
However, capacity addition by most steel companies may help companies report a higher net profit in the quarter that will be under review.
Though the EBIDTA margins compared on year-on-year basis may rise, it will be down on sequential basis due to the cost pressure, said an analyst.
Taking the cue from international markets, steel companies have cut prices in November despite good demand.
Imports have been a major threat for the steel companies of late.
With the appreciation of rupee against dollar, large industrial users prefer to import as they are offered good discounts for bulk purchases.
JSW Steel had resorted to marginal production cut in November on the back of increasing imports and fall in international prices, said an analyst.
JSW Steel production was down to 5,08,000 tonnes in November against 5,59,000 tonnes in October.
Raw material cost
SAIL, which hiked prices by Rs 700 a tonne in October, had to offer discount for similar amount in November due to fall in the international prices and depreciation of rupee against dollar, said Mr Ram Modi, Research Analyst, Dolat Capital.
“SAIL had witnessed a good demand in the long products including TMT bars whereas demand was subdued for structural steel. We expect steel prices to be firm in the fourth quarter of this fiscal due to higher raw material cost and expected restocking demand in the international markets,” he said.
Internationally, prices of key raw materials such as iron ore and coking coal have started inching up due to recovery in demand for steel.
China effect
Cheap imports from China may be short-lived as their domestic prices have shown signs of improvement, said steel company executive.
“We expect the downside for steel prices from here is very limited and it is an upward bias going forward,” he added.
Iron ore prices at Rs 165 a tonnes C&F (cost and freight) and substantial rise in coking coal prices, it will be difficult for steel companies to sustain at higher raw material prices for long without hiking prices.
“The cost pressures are still continuing. The prices of steel are not going up in the same pace at which raw material prices are going up. I do not expect big recovery in the margins in the near future,” he said.
Pricing power may remain with the miners for a couple of years until excess capacity in the international steel arena dries up and fresh mining capacity added.
Until that time, the current lower levels of operating margins o continue.
The current system of quarterly contract by the miners will extract the benefit of any steel price increase.
For the January-March 2011 quarter, we expect iron ore contract prices to settle about eight per cent higher sequentially while coking coal contract prices should be settled at seven per cent higher (between $220-225 a tonne), said Ms Chandrani De, Research Analyst, Ambit Capital.
“We expect steel companies to largely pass on the input price hike to consumers. But a significant expansion in margins, led by any large steel price increase seems unlikely,” she added.
Global players
In April 2010, the steel industry had been forced to adapt to the new system of quarterly pricing for raw materials such as iron ore and coking coal instead of the prior practice of annual resets in contract prices.
The industry saw 90 per cent increase in iron ore prices and 55 per cent coking coal.
The global seaborne trade is dominated by three players – BHP Billiton, Vale and Rio Tinto — which together accounted for about two-thirds of the trade.
The Australian and Brazilian miners have accounted for about 67 per cent of the global iron ore exports.
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