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Despite a ‘conducive’ domestic demand scenario, the steel sector may remain vulnerable to swings in global prices and demand.

Adarsh Gopalakrishnan

BL Research Bureau The steel sector had a rough start to the year, with June quarter net profits down between 25 per cent and 55 per cent for the four key domestic players — Tata Steel, Steel Authority of India Ltd (SAIL), Jindal Steel and Power and JSW Steel.

Even as the quarter saw a resurgence of steel demand in China due to heavy infrastructure spending, the global picture remained bleak. India bucked the global collapse in volumes due to the tight demand-supply equation. Unlike cement, pricing power for domestic steel producers remains weak, as imports remain an ever-present threat. Given the global under-utilisation of capacity, India is a lucrative market for shipments from overseas.

The large listed players closed the quarter with declines in net sales ranging between 9 per cent and 20 per cent, as much lower realisations offset the benefits from reasonable domestic volume growth.

The numbers also suggest that steel companies did not reap substantial benefits in raw material costs in the June quarter from the global commodity price correction. Partly integrated players such as Tata Steel and SAIL saw an actual escalation in input costs over last year. For others, the benefits of lower contract prices on raw materials sourced externally are yet to flow in. Other expenses such as power and fuel and overheads also hurt profits in some cases.

Between the top two domestic players – SAIL and Tata Steel — the former reported a sharper drop in sales (down 20 per cent), while Tata Steel’s sales contracted 8.7 per cent.

Both companies witnessed a year-on-year increase in raw material costs, probably on account of coking coal imports even as the rest of inputs were sourced captively. However, SAIL’s margins proved more vulnerable to input cost escalations with raw material costs accounting for 41.3 per cent of its sales compared to just 28 per cent for Tata Steel in the June quarter. A drop in employee costs, a lower tax payout and interest earned during the quarter helped SAIL manage better performance at the net profit level. SAIL reported a 28 per cent drop in net profits while Tata Steel saw a 47 per cent decline in its bottomline for the June quarter.

If backward integration prevented the above players from reaping full benefits of input price corrections, the non-integrated players didn’t do too well either. JSW Steel saw a mixed performance with consolidated sales falling nearly 11 per cent, even as turnover grew 43 per cent (helped by new capacity commissioned) and exports plunged 62.6 per cent.

Raw material costs as a proportion of sales already high at 60.8 per cent, rose marginally over the last year. However, this was partly offset by a halving of ‘other expenses’. The net profit including of associates was down 6.5 per cent, without the ‘other income’ on account of foreign exchange.

Despite a ‘conducive’ domestic demand scenario, the steel sector may remain vulnerable to swings in global steel prices and demand, as that is the deciding factor for pricing.

The name of the game during the current expansion phase may be to keep the overheads tight, given that raw material price fluctuations can skew the equation, favourably or otherwise.

The importance of securing raw material linkages cannot be overstated considering the fragmented nature of the steel industry globally and locally.

More Stories on : Steel | Steel | Steel Authority of India Ltd

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