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| Sales, profits in steel sector decline in Q1 |
| B G Shirsat / Mumbai Aug 12, 2009, 01:16 IST |
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 Steel companies’ results failed to shine in the quarter ended June, despite a decent 5 per cent rise in domestic sales, a 10-15 per cent rise in steel prices from the recent lows and around 30-50 per cent decline in costs of raw material.
Their net sales declined by 11 per cent, as steel prices are still lower by almost 30 per cent over year ago levels. The operating margins declined by 595 basis points, due to a 20 per cent decline in price realisation and a 1,000 basis points increase in the ratio of raw material costs to sales. The profit before tax has declined by 48.7 per cent, while reported net profit declined by 30.9 per cent.
However, the performance of steel companies over the sequential quarter has raised hopes of improved profitability in the second quarter.
| Q1 PERFORMANCE OF STEEL COMPANIES |
| Quarter ended |
Sales* |
Total cost |
Raw mtrl |
Net profit |
| Jun ’08 |
34.48 |
35.91 |
32.70 |
10.07 |
| Sep ’08 |
39.21 |
45.16 |
50.79 |
15.31 |
| Dec ’08 |
-5.33 |
16.99 |
24.02 |
Net loss |
| Mar ’09 |
-5.80 |
3.74 |
10.52 |
-35.78 |
| Jun ’09 |
-10.97 |
-5.27 |
-0.67 |
-30.91 |
| * Growth rate in per cent |
The operating margins are higher by 334 basis points over the quarter ended March 2009, as the raw materials costs to sales ratio declined by 334 basis points due to softening of prices of contracted iron ore by around 30 per cent and coking coal by around 50 per cent.
Further, revival of demand from spending on infrastructure indicates a positive outlook for the steel industry. According to a study by Standard Chartered Capital Markets, the industry is expected to grow by four per cent in terms of volumes, as they are expected to replace net imports of 2.1 million tonnes in 2009-10.
The front-line steel companies reported a 5.1 per cent rise in volume over the sequential quarter, compared to 3.8 per cent in March 2009 over December 2008. The volume had declined by 13.6 per cent in the September 2008 quarter over the June 2008 one. Steel prices globally have passed the trough, post the financial crisis, and are currently quoting at around $500 per tonne for hot rolled coils. Indian steel prices are also exhibiting strength mirroring the global trends.
Going forward, steel prices are expected to be robust, as the demand is expected to peak from various construction, infrastructure and consumer goods sectors.
The performance of steel companies during the quarter ended June remained subdued, with Steel Authority of India (SAIL) and Tata Steel reporting a decline in sales and profits. The net sales of SAIL declined 17 per cent, while net profit fell by 27.7 per cent. The operating margins fell by 660 basis points, as the cost of raw materials to sales rose sharply by 1,610 basis points due to the high cost of coking coal inventory. According to Citigroup, analyst input costs should fall in the coming quarters on lower cost of imported coking coal and increased captive coal output.
The net sales of Tata Steel declined by around 9 per cent due to a fall in ferroalloy sales and decline in realisation by around 20 per cent.
Steel production for the quarter ended June was up 30 per cent at 1.54 mt, while steel sales were up 22 per cent at 1.42 mt.
Interest cost during the quarter under review was higher, as the company has taken additional debt of Rs 4,000 crore in the form of ECBs and term debt, coupled with marginal increase in borrowing cost.
The net profit has declined by 46.9 per cent, due to a 1,436 basis points decline in operating margins and a sharp upswing in cost of raw materials. Going forward, the company is concerned about pricing power, especially in long products, due to weak monsoon demand and cheap imports.
JSW Steel reported a drop of 10 per cent in consolidated sales on the back of low steel prices and lower sales at its US subsidiary. At standalone level, the company reported a growth of 6.1 per cent in net sales due to sharp upswing in volume.
The operating margins fell marginally by 58 basis points, despite decline in cost of production per ton.
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