Steel uncertainty worries FIIs

JSW Steel says input cost spike dents margins.

Seshagiri Rao, finance director of JSW Steel, is a worried man. The company, like much of the steel industry, is in a cleft stick for two reasons.

First, the rising input costs are putting pressure on operating margins, which slipped 70 basis points y-o-y to 31.8 per cent in the first nine months of FY08.

And second, an inflation-wary government is pressuring the industry to hold its price line. "The industry is in a catch-22 situation," Rao told a media meet here today.

JSW Steel, the flagship company of the OP Jindal group, alongwith some other steel companies, levied a raw material surcharge of Rs 5,000 a tonne last week as coal and iron ore prices "have gone through the roof". Rao said there was no alternative to the price hike if the industry had to survive.

The uncertainty on the price outlook has prompted at least one institutional investor to write to the company for clarifications.

"FIIs are worried as they feel uncomfortable with uncertainty," Rao said. The company's shares have slumped 43 per cent this year.

NMDC had raised iron ore prices by 47 per cent with retrospective effect from October 2007. The state-run company is slated to announce another big increase but nobody seems to know when.

JSW imports 3.5 million tonnes of coking coal and buys 30 per cent of its iron ore from NMDC, which is India's largest producer. The company currently meets only about one-third of its iron ore requirements from captive sources.

Some of the world's biggest steel makers have agreed to pay as much as 71 per cent more for iron ore this year.

Coal prices have increased $210 a tonne so far in April, making coke for steel, a key raw material, even dearer.

The Indian industry is expecting a formal price hike announcement for coal after negotiations with Japanese miners, who set the benchmark for prices, are completed. "We don't have any negotiating power left on this," Rao said

Arcelor Mittal has recently agreed to an increase of 220 per cent for high quality coking coal with BHP Billiton for 2008 contracts.

Steel prices have risen almost 33 per cent in 2008 on higher raw material and freight costs. Worried it could fan inflation, the government cut or withdrew import duties.

But Rao said he does not think more steel will come into India because prices are steeper overseas.

JSW reported its first profit decline in seven quarters in January as the cost of buying and transporting materials have risen sharply.

The company is on the threshold of a major expansion plan of adding 3 million tones per annum (mtpa) to its current capacity of 4 mtpa, and further to 10 mtpa by 2010.