Steel: Hard times to stay

Steel: Hard times to stay
Business Standard, Money & Markets, February 26, 2009, Section II, Page 1

The lower prices could stimulate demand though not significantly

Steel makers plan to trim prices of steel by about Rs 600 per tonne following the 2 per cent cut in excise duties.But that’s unlikely to result in a spurt in orders from the real estate or automobile players though players in the infrastructure space may be willing to buy more.Until there’s a fullfledged revival in demand, companies will have to live with low realisations-prices have fallen sharply by around 30-40 per cent since August last year and now range between Rs 32,000 and Rs 36,000 per tonne. That’s what caused JSW Steel (standalone) to report losses before tax of Rs 139 crore in the December 2008 quarter. This number doesn’t include foreign exchange losses. Of course, the company also sold a smaller amount of steel—it had actually scaled down production by 20 per cent and therefore revenues remained flat. In fact, others too netted lower realisations as a result of which sales at Tata Steel, for instance contracted 3.5 per cent while SAIL’s revenues were down 6 per cent.

High raw materials continued to pressure operating profit margins(opm) at JSW Steel—the opm was down by about 1400 basis points to 15.3 per cent. Tata Steel’s margins too came off by about 1200 basis points, though of course they were far higher at 30 per cent.

In the current year Tata Steel is expected to post sharply lower profits compared with the Rs 7,700 crore reported in 2007-08, with its overseas subsidiary Corus expected to report only a small surplus. Analysts are also forecasting afall in profits in the following year and that’s why the Tata Steel stock is quoting at a price-earnings multiple of less than 3 times estimated earnings in 2009-10. JSW Steel’s net profits too are tipped to fall this year from the Rs 1,728 earned in 2007-08. However, since the company is not as exposed to the overseas markets as Tata Steel is, a revival in demand at home could mean better operational profits in 2009-10. Nevertheless the company could continue to incur foreign exchange losses and that could hurt the bottom line.