After hitting a high in July-August 2008, steel prices declined by more than 50-60% in the aftermath of the global recession. Since then, prices seem to be on a strong uptrend again and prices in the international market are firming up. Demand, especially from the automotive sector, has been picking up. For instance, prices of hot rolled coil (HR) which, in the fourth quarter of 2008-09, were ruling at about 29,500 per tonne, are currently at around Rs 32,000-35,000 per tonne. That?s about an 18% increase and analysts believe high prices will persist, given that HR coils are used primarily in the automobile industry. CLSA points out that in China, demand from the downstream sectors has improved and inventories are easing.

As such, end-users of steel are expected to step up purchases in the first quarter of 2010 in anticipation of higher steel prices. Part of the increase will be due to the cost-push effect of higher raw material prices. Contract prices of coking coal and iron ore are set to rise. Experts believe that the margins of steel producers are expected to be under pressure once the full impact of higher input costs is felt . That?s despite a price rise in the finished product.

Prices of iron ore contracts, which are due to be renegotiated early next year, are expected to be finalised at higher levels of anywhere between 10% and 25% over those of 2008-09. Iron ore contract prices in 2008-09 were sealed at $75 a tonne, while coking coal prices were sealed at around $300 per tonne. While in the current year, long-term coking coal prices have fallen to $128 per tonne, in the spot market, prices are ruling slightly higher.

As CLSA observes, steel sector EBITDA per tonne could come under pressure during April to June 2010 once the higher input prices kick in as there is still a considerable level of over-supply in the western world. Indian steel producers? bottomline in the third quarter of financial year 2009-10 may be good, as the real impact of the increased raw material prices will be seen only in the fourth quarter of 2009-10. Moreover, the actual profit will only be visible from the fourth quarter onwards when the prices of raw material and finished goods increase from January next year onwards.

Prices in Europe and Asia have started moving up. Moreover, in China, steel demand from most downstream sectors has improved and inventories have started easing, which is resulting in higher steel prices.

Anil Surekha, director-finance, Ispat Industries Ltd said: ?I don?t see the bottomline to be much impacted by the rise in prices because, along with the price increase in steel, the raw material prices are also increasing at the same time. Hence there will not be any significant impact on the bottomline.? Tata Steel Ltd, the world?s eight largest steel producers stand alone net profit for the second quarter of 2009-10 fell by almost half due to falling steel prices globally. Tata Steel?s consolidated earnings were also hurt by the weak performance of its European unit Corus, which was impacted due to lower prices and production at its European unit.

Jayant Acharya, director-sales and marketing, JSW Steel, believe that the steel price rise should be positive for the bottomline of the companies. ?The hike in raw material prices may not come in the current quarter, hence the bottomline is expected to be good. However, the bottomline will be under pressure once the increased raw material prices kick in, but we are hopeful of maintaining the margins and we are working out the efficiencies,? he adds.

JSW Steel has maintained its guidance of EBITDA per tonne of $150 for the full year.

In 1HFY2010, the company posted an EBITDA per tonne of $139 per tonne.