Tata Steel?s European operations under Corus may be looking at a pricing dilemma: Passing on the rise in input costs to consumers could be counterproductive since steel demand is still 25% lower than the levels seen in 2007. And if it doesn?t, the soaring prices of iron ore and coking coal could hurt its margins.
Coal and iron prices have been on a steady climb, and are near historic highs. However, questions remain over whether Corus will be able to pass on the higher costs, and if it will be able to sustain the higher price for a full year.
HM Nerurkar, MD, Tata Steel, has already hinted at pressure on Corus margins due to rising raw material prices. Corus is fully dependent on imported raw materials for steelmaking.
Industry experts are of the view that the lukewarm demand environment in Europe will make it difficult for Corus to pass on and sustain the entire hike in raw material prices.
Bijal Shah, an analyst with IIFL in her recent report had said: ?The total global steel consumption in 2010 is estimated at 1.2 billion tonne, the same as in 2007. However, the demand growth is driven by China, and demand from Europe is likely to be 25% below that in 2007. We believe a steel price increase in Europe may be difficult to hold in the second half of this financial year, as demand there is still lacklustre.?
The European arm of Tata Steel is expected to face a cost push of $140-150 a tonne on account of surging raw material prices.
Nerurkar was reported as saying that ?coking coal prices had increased by $125 to around $220 a tonne, while iron ore increased from $65 to $110 a tonne, putting pressure on input costs. Corus accounts for about two-thirds of the group?s steel production, at 20 million tonne. ?
The IIFL report added: ?Corus will be able to just recover the higher input cost. Expectations of a meaningful improvement in profitability in FY11 are misplaced. That said, profitability till the first quarter of FY11 is likely to actually improve, because steel prices have already moved up in anticipation of an increase in input costs. However, the full impact of an increase in contract prices of iron ore and coking coal will be evident only in the second quarter.?
However, Tata Steel?s domestic operations are expected to see their cost advantage widening and will continue to be a significant contributor to consolidated earnings.
Tata Steel?s Indian operations enjoy a sustainable cost advantage due to its 100% backward integration for iron ore and 65% integration for coking coal. Iron ore and coking coal prices for FY11 contracts are expected to increase by 90% and 60% respectively.
Experts believe the cost push for the steel industry is prompting in an increase in prices. However, the increase in costs for Tata Steel is expected to be small in comparison with most global steelmakers.