For the first time in three years, India?s largest steel company, Tata Steel, on Wednesday posted a drop in quarterly profit. It came a day after public sector Steel Authority of India Ltd reported its profits had halved in the third quarter of 2008-09. The dip in their bottomlines is result of the meltdown in the global steel business.
Tata Steel?s net profit fell 56.36% to Rs 466.24 crore for the quarter ended December 31, against Rs 1,068.58 crore in the corresponding quarter the previous year. The figures exclude Corus, the UK company it acquired in January 2007. This is despite both Tata Steel and Sail having their own iron-ore mines that act as a buffer to rising costs.
The results did not surprise the markets, though, which felt some steel companies had become undervalued and were good buys. At the BSE, Tata Steel shares rose 2.64% to close at Rs 176.85. Preeti Dubey of BNP Paribas said in a research note on Wednesday, ?While we expect stock prices of steel companies will drop in the near term, we see inherent value in steel companies as they are trading below their replacement costs.?
JSW Steel, which also released its results on Wednesday, posted a consolidated net loss of Rs 193.61 crore for the third quarter. Analysts say the scenario is unlikely to improve this quarter either as there are no signs of improvement in steel prices. ?We expect the current steel down-cycle to last two years, shorter than previous down-cycles, as global fiscal stimulus leads to a ?V?-shaped global economy recovery. We expect profitability to nosedive in the near term and stabilise at lower levels,? Dubey stated.
All steel companies have been hit by rising raw material costs. Tata Steel, for instance, has to buy a third of its coking coal, the long-term prices of which have surged to $300 a ton, while iron-ore prices have almost doubled in the current year. The company said there had been a 78.56% increase in the Q3 cost of raw materials consumed to Rs 1,611.17 crore, against Rs 902.32 crore last financial year, even as net sales for the quarter were down 3.91% to Rs 4,735.68 crore, compared with Rs 4,928.23 crore.
This is the trend for steelmakers across the globe as the economic slowdown and credit crunch have significantly impacted large automotive and construction customers. For the first time since 2002, world steel production dipped 1.2% in 2008, as steel majors, including Arcelor Mittal and Posco, cut production as demand slowed. According to the World Steel Association, combined steel production in 66 countries stood at 1,329.7 million tonne, a fall of 1.2% compared with 2007.