High prices may fuel steel firms' net profit 25%

Investment research analysts expect steel companies to report about 25 per cent rise in profits and 20 per cent increase in turnover following enhanced capacities and steady steel prices during April-June 2007.

Manoj Bothra, an analyst at Ernst & Young, said, "For companies such as Essar Steel, Jindal South West (JSW) and Bhushan Steel, which have enhanced capacities significantly during the last year, volumes will go up. These companies may report up to a 25 per cent rise in profits.

For others such as Tata Steel and Steel Authority of India (SAIL), where expansion plans are under way, better results may be visible during the third and the fourth quarters."

Essar Steel increased the capacity of its Hazira plant to 4.6 million tonnes per annum (mtpa) last year.

JSW completed its 1.3 mtpa expansion and Bhushan Steel increased its capacity by 0.5 million tonnes in Orissa. "Margins may remain stagnant, so volumes will play a greater role," he added.

Another Kolkata-based analyst was of the view that margins would not change much on account of stable input costs during the period. "Although, coking coal prices have declined by $20 during the quarter, it may not reflect now as orders were contracted earlier," he said. Year-on-year, coke prices have risen by 6-8 per cent during the quarter. Coke accounts for 30-35 per cent of input costs.

"Strong iron ore costs were countered by steelmakers through captive mines and long-term contracts," he added.

Though steel prices were stable during the period, prices of long products rose from an average price of Rs 26,500 a tonne to Rs 31,400 a tonne (18-20 per cent) from April to June on account of increasing demand from hastened construction activity before monsoon.

Prices of hot-rolled coils, which are taken as a benchmark for flat steel products, were up 5.5 per cent year-on-year during the quarter. The passenger car industry, a major consumer of hot-rolled products, has grown by around 13 per cent during the period.

Steel companies did not raise prices much during the quarter on account of growing government intervention.

Stocks of SAIL, Tata Steel, JSW Steel and Essar Steel are buoyant on account of market expectations of good results and have gained 21.7 per cent, 11.6 per cent, 15.6 per cent and 4.8 per cent respectively in the past one week.