It's a double whammy for the steel maker with prices coming off and demand slowing down.
The difference was obviously much too large to sustain. Just a month back, JSW Steel had scaled back prices by 8-12 per cent taking the total cut to about 25-30 per cent. Internationally, steel prices have come off by around 50 per cent in the past two months and global players such as Corus and Arcelor Mittal have already announced plans to cut back production in a bid to maintain prices. If demand comes off further, steel companies will be selling less.
However, since most of them have entered into long-term agreements for the supply of coal, they will have to live with a higher cost of production till the contracts are renewed. Overall, the outlook for the sector doesn’t appear to be very encouraging at least for the next six months.
Meanwhile, in the September 2008 quarter, stand-alone revenues for JSW grew nearly 59 per cent y-o-y due to higher realisations as also better volumes which were up 14 per cent. Realisations have come off after September and should demand weaken, the top line is not likely to grow at anywhere near those levels in the near future.
Even with strong realisations, the steel maker saw its operating profit margin dented by 670 basis points y-o-y to 25.5 per cent — raw material costs rose 116 per cent. Needless to say margins will stay under pressure till fresh contracts are negotiated for coal — prices of which have softened — some time in the March 2009 quarter. Even without the notional forex losses of Rs 268 crore, JSW’s profit before exceptionals was up barely 7 per cent at Rs 739 crore. It’s hard to say where the bottom line is headed.