Price squeeze to hit steel makers' margins

Margins of all leading steel companies may shrink by 8-10 per cent in the first two quarters of the current fiscal compared with the corresponding period in the previous fiscal, said leading steel analysts.

This is because steel prices have come down to Rs 22,000 per tonne from Rs 29,000 per tonne three months back. Analysts have attributed the decline to an over-supply situation and they expect further reduction in steel prices at least for another quarter. They see an upturn coming only after that.

"Prices of raw materials such as coal and iron ore have shot up in recent past, adding to steel makers' woes. However, integrated steel manufacturers such as Tata Steel and SAIL is less likely to be affected by increase in raw material prices compared with non-integrated manufacturers such as Jisco, Essar, and Ispat," said a leading steel analyst.

For the whole fiscal year, the margins are expected to decline by 5-6 per cent compared with the fiscal ended March 2004, they added.

"There has been a price erosion of 25-30 per cent on steel over the last couple of months. The ill-effect will be visible on the margins of leading steel manufacturers, which are likely to be impacted by 5-6 per cent," said Sridhar Iyer, cement analyst at Batliwala & Karani, a leading Mumbai-based equity research outfit.

Sheshagiri Rao, director-finance, JSW Steel, admitted the over-supply situation has resulted from a significant dip in demand for steel in Europe, especially from France, Germany and Italy, due to low economic growth over the past few months.

"The situation has somewhat been saved by a 35 per cent growth in China over the last five months. However, a pressure on the margins of Indian steel companies is certain," he added.

As a result of the demand, the prices of steel coil and steel scrap in China has increased by 16-20 per cent over the past 10 days, he said.

Tata Steel, Steel Authority of India Ltd (SAIL), Jindal Iron & Steel Co (Jisco), Essar Steel and Ispat are the leading steel manufacturers in the country. Last week, SAIL, Tata Steel, Jisco, Ispat and Essar Steel reduced prices by Rs 2,000 to Rs 3,000 per tonne.

This was the second cut in recent months. In April, some of these companies had their first round of price cut by about Rs 2,000 per tonne.

The global steel prices have come down to $400 per tonne from $700, few months back. Global steel companies such as Mittal Steel, ThyssenKrupp and Arcelor have cut their steel production to limit inventory build-ups and the resultant decline in prices.

Indian companies are continuing with their existing despatches. They are currently liquidating the steel inventory, which has been accumulated during the demand season. Domestic steel industry is believed to have inventory enough to meet demand till October.

"The players are trying their best to increase volumes when the prices are not working," said an analyst. "Steel companies are seeing some positive signs by October. Domestic demand coupled with Chinese demand should make the situation better," said JSW's Rao.

"The current decline in steel prices is just a correction. An improvement is expected by October," said a senior Ispat official. However, a sector analyst pointed out that even if there was a correction in steel prices, the margins of the steel companies would remain flat.

Feeling the pinch

• Steel prices have come down to Rs 22,000 per tonne from Rs 29,000 per tonne 3 months back
• Over supply due to a dip in demand from European countries cited as the reason for the sharp decline
• For the whole financial year, margins are expected to decline by 5-6 per cent
• Last week, SAIL, Tata Steel, Jisco, Ispat and Essar Steel reduced prices by Rs 2,000 to Rs 3,000 per tonne