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| Steel firms may face a dismal third quarter |
| Kunal Bose / Nov 10, 2009, 00:07 IST |
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Quarterly results of companies engaged in the commodities business are bad crucibles in which forges a view of the future. But operators driven, as they are, by emotion and unconscious fantasy will see a fall in turnover and profits for a particular period, which signals to sell and book profits.
That is why both Steel Authority of India (SAIL), the country’s largest producer of ferrous metal and Tata Steel, which has given shape to its global ambition by acquiring Corus and also some relatively small steel makers in south east Asia, came under some selling pressure on stock exchanges post announcement of their half yearly results.
While the market reaction to the paring of profits in both cases is on expected lines, astute observers would not fail to notice the significant improvement in house keeping mitigating the impact of steel price falls to a considerable extent. SAIL chairman Sushil Roongta estimates the “adverse impact” of the steep fall in steel prices from the high of corresponding period of last fiscal in the case of his company at around Rs 3,000 crore.
But Roongta, who has come to represent the cerebral face of the industry, responded to the challenge of a weak market by stepping up production of value added items, all round cost control and better fund management. It will be wrong to consider overall saving of Rs 1,000 crore resulting from the host of initiatives in the second quarter as a one off development.
In times like this, pressure builds up on all steel makers to become more efficient by improving techno economic parameters. To the extent this happened in the past quarter should become a permanent feature with SAIL. Net sales of the company slipped 21 per cent to Rs 13,544 crore and net profit by 17 per cent to Rs 1,663 crore in the second quarter on a year-on-year basis.
A combination of steel prices falling as much as Rs 10,100 a tonne to Rs 29,900 from last year’s “historic high” in the second quarter, a Rs 60,000 a tonne set back in realisation from ferro chrome sales, planned shutdown of some units and also accumulation of some slabs now being utilised will explain Tata Steel finishing the quarter with net profit nearly halved to Rs 903 crore.
Though not widely known, chrome concentrate and ferro alloys constitute an important portfolio for Tata Steel. Not only is Tata Steel the unquestioned leader in ferro chrome business here with a market share of around 36 per cent but for major part of last year when global producers were stretched to meet the soaring demand for the alloy, it claimed a 4 per cent share of the world market.
It will be begging the question to know the fate of others in the industry when SAIL and Tata Steel with the benefit of total sourcing of good quality iron ore from owned mines had to take a hit in profits. But then how did JSPL manage to raise net profit by Rs 791 crore to Rs 1,797 crore in the first half? Take a look at segment-wise results of JSPL for the answer. The company’s bottom line got the boost entirely from power business where profit before tax and interest rose to Rs 1,869 crore from Rs 741 crore. That JSPL’s profits from iron and steel segment saw a colossal fall then go without saying. Downturn in the commodity in line with other metals ate into profits of other steel makers too.
Don’t expect anything much better to happen to the steel industry’s profits in this third quarter. Hasn’t Roongta said that prices of long products have come under pressure because of comfortable domestic supply scene while the flats are going through price correction? What should, however, bring some relief to the industry is that long-term contracts for coking coal done at rates of around $300 a tonne have started ending. According to Tata Steel CFO Koushik Chatterjee, “The blended coal cost will fall to $160 a tonne in the December quarter.”
Profit erosion should not detract attention from the bigger picture of our steel consumption growing at least 9 per cent this year. At this stage of our economic development, growth in use of steel will remain some percentage points ahead of GDP growth rate.
Steel minister Virbhadra Singh is right that a whole new big market for steel will open up in Indian semi-urban and rur al areas provided the material becomes easily available and at “affordable rates.”
Singh is to the point that before a strategy to promote steel use in basically virgin areas is formulated we should get a comprehensive survey done. To make the survey broad based, the ministry’s consulting arm JPC will cover 300 districts and 1,500 villages.
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