Sesa Goa: Slow demand

With major steel producers cutting back production due to the fall in demand, it is natural that iron ore manufacturers would be under pressure.

Thus, there’s no surprise to see Sesa Goa’s revenues slowing down considerably. Revenues grew by 138 per cent in the first half of 2008-09, but in the December 2008 quarter, it managed to grow by just under 12 per cent to Rs 1,360 crore. This is despite a 37.4 per cent y-o-y growth in volumes as realisations came off by 17 per cent on a y-o-y basis.

Iron ore, the main input for producing steel, has seen low demand globally and most players are witnessing pressure on the revenues front. International ore producers such as Vale and Rio Tinto had already cut production by 10 per cent during November and December 2008, and have stated that they are watching the market closely for developments. What is worrying is that prices could head lower next year too. Sesa Goa sells close to half of its iron ore on spot prices and the rest on contracts and with annual contracts coming in for re-negotiation this year, all players including Rio Tinto and Vale may have to settle for lower prices.

Sesa Goa’s realisations in the December 2008 quarter halved to Rs 2,296 per tonne from Rs 4,666 per tonne in the September 2008 quarter. China is the biggest consumer of iron ore and smaller Chinese steel mills are important customers of Indian exporters, but these mills cut production in the second half of 2008 due to the economic crisis.

The Chinese government has announced a stimulus package of $585 billion to increase spending on housing and railroads which could help revive steel demand in the country though there is no impact yet. Chinese iron ore imports were up one per cent y-o-y in December 2008 to 34.53 million tonne, but analysts say that’s because of older agreements and does not mark a revival as yet. Higher transportation costs resulted in the operating profit margins falling sharply by 2,100 basis points y-o-y to 41.2 per cent in the December quarter.

Higher other income helped cushion the drop in net profit to just 7.3 per cent at Rs 471 crore, which includes a foreign exchange loss of Rs 65 crore during the December 2008 quarter.