Steelmakers stare at a lacklustre third quarter

As steel prices are not seeing any signs of revival, analysts believe that the growth in volumes will not translate into improving margins for the companies. An industry official on the condition of anonymity told Business Standard that a couple of steelmakers did try to increase prices in January but rolled most of it back as the demand languished.

Abhijit Mitra and Neerav Bagaria of ICICI Securities, in a recent report, said that the volume growth in the sector will be meaningful from companies like SAIL and Jindal Steel and Power, however, decline in margins in the third quarter will impede margins.

They said, “Tata Steel (standalone) is  expected is expected to post a decline of Rs 500 per tonne on a quarter-on-quarter basis in realisations in the third quarter. The company in particular has failed to pass through any major price increase in the quarter.”

Even though the steel demand looks weak the steelmakers have continued to increase production. The steel production at JSW Steel’s Vijayanagar plant went up by 8% in the third quarter of current fiscal as against the same period last year. Tata Steel, too, produced 2.09 million tonne steel in the given quarter as against 1.93 million tonne is the same quarter of last fiscal.

These production increases did not translate into sales. Enam Equity Research, in its January reported suggested that the steelmakers will continue to report weaker demand for their products. It said, “We expect NMDC and Tata Steel to post muted numbers for Dec ’12 quarter due to lower volume off-take. We expect volumes to improve in Mar ’13 quarter due to seasonal demand (pick up in construction activity).”

Mitra and Bagaria of ICICI wrote, “The true impact of  restocking should be felt in Q4FY13 where simultaneous impact of price rise as well as weak raw material prices can lead to a positive surprise.”