The country’s steel producers are likely to witness margin squeeze in the first quarter of the current fiscal on account of price cuts and cost pressure, experts said. Steel majors like SAIL, JSW Steel and Tata Steel are expected to take a hit on margins in the first quarter, followed by a bigger drop in margins in the second quarter of FY11.
Fall in realisation due to price cut in June and further hike in coking coal and iron ore prices would result in margins coming under severe pressure for steel players in the second quarter of the fiscal. Sanjay Jain, analyst with Motilal Oswal, said, ?Coking coal costs are likely to increase due to 55% q-o-q price hike in 1Q FY11 and further 12.5% q-o-q increase to $225 per tonne in 2Q FY11. This will affect margins of SAIL, Tata Steel and JSW Steel due to dependence on imports.?
Similarly, the 90-100% increase in cost of iron ore in Q1FY11 and further 25% price hike expected in Q2FY11 will increase cost of production for JSW Steel and for Corus as well. However, SAIL and Tata Steel India will not be impacted from iron ore cost increases since they own their own iron ore mines. ?Though Corus? management sounded very confident about the first half of the current fiscal earnings when Tata Steel reported Q4FY10 results, we are less confident about Q2FY11 due to the change in market conditions post the results,? Sanjay Jain stated in his report. JSW Steel joint MD & group CFO Seshagiri Rao recently told FE, ?Steel prices have already corrected by $100 a tonne and Indian companies had reduced prices on June 1.? Rao, however, believes demand has stabilised over the last couple of weeks and feels the downside from these levels will be limited.
SAIL has cut hot rolled coil prices (via discounts) by a total of Rs 2,800 per tonne in two tranches since June 1, 2010. Similar or even bigger price cuts have been offered by other players including JSW Steel, Tata Steel and Ispat Industries. It is further understood that hot rolled coil is being sold to bulk buyers at further 5% discount. However, despite price cuts, dispatches have not recovered to normal levels, as price outlook still remains weak. Industry sources say, few Indian producers are also contemplating further price or production cuts to deal with mounting inventories.
Prices of hot rolled coil are currently at about Rs 32,500 a tonne, a fall of Rs 2,000 a tonne over the last month. Traders are reported to be selling imported HRC at prices around Rs 29,000 per tonne. Experts say, demand in India is still good but they would not be surprised if steel manufacturers announce one more round of price cuts, which could be in the range of about Rs 1,000 to Rs 1,500 per tonne.
However, margins are expected to rebound in second half of FY11, as market forces adjust steel prices and raw material costs.