Sales, profits in steel sector decline in Q1 (updated - 12 Aug 2009)
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.

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.

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.

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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.
source - BS

Sector Specific - Steel Industry                

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.

Steel industry           (updated - 31 Aug 2009)
For Indian steel companies, the present may not be perfect, but the future isn’t that tense either. A scenario that prompted Ratan Tata to announce at the Tata Steel annual general meeting last week that the company would raise its European production to 80 per cent of the capacity from the current 50 per cent by the year-end.

“Demand is picking up in the West and the trade fall in Europe and the US has bottomed out,” the Tata Group chairman said, even while announcing that the steel major’s consolidated loss has gone up sharply.

No one is saying the steel industry is out of trouble. The financial crunch continues, and coupled with high cost of input, severely affected the first-quarter profits of steel companies. But most agree with Tata that the signals are encouraging.

A report by RNCOS, the marketing research and analysis company, says per capita finished steel consumption in the country, estimated at 44 kg in 2008-09, is projected to reach 54 kg by the end of 2011-12, showing the tremendous growth potential in coming years. The report - Indian Steel Industry Outlook to 2012 - says despite the slowdown, steel output rose 3.4 per cent in the first quarter of fiscal 2009-10, in comparison to the first quarter of 2008-09, while steel consumption was also up by 5.3 per cent.

Moreover, India was ranked the third largest steel producer in the world after China and Japan during January-May this year. Anticipating a major recovery, the steel minister projected a 6-8 per cent growth for the industry during 2009-10. Steel analysts and company heads said the two major steel products — long and flat— would be hot properties again within two quarters.

India’s largest steel-maker, Steel Authority of India (SAIL), registered a 14 per cent growth in July by producing 1.08 million tonnes (mt) of saleable steel, while its sales recorded a 25 per cent jump. Tata Steel clocked an 18 per cent rise in domestic sales, at 0.48 mt in July. The highlight of the growth story was a 48 per cent jump in long product sales, supported by the infrastructure sector’s revival.
With the firming of demand, JSW Steel has reported a 51 per cent jump in crude steel output. It crossed 0.5 mt in July. Taking a cue from the market, SAIL and Tata Steel hiked prices on flat products to the extent of Rs 500 to Rs 1,000 a tonne.

Navin Vohra, partner, Ernst & Young (E&Y), said while steel exports had come down, the surplus was being supplied in the domestic market because of the rising demand.

Edelweiss’ Senior Vice President Prasad Baji said the prices of long products have stabilised after the recent decline and were set for a move up, supported by the growth in construction and engineering sectors. Flat steel prices were going up, along with growth in volume, he said.

“Steel consumption has risen 5-6 per cent in the first quarter and it is estimated to rise further in the current quarter. In the last two quarters of this financial year, it would increase to 8-10 per cent,” added Baji.
“India’s capacity is short, but the demand is strong. Thus, the space for growth is higher,” Vohra said.
source - BS