SAIL: Raw material reprieve

There’s news that SAIL may be able to buy coking coal from BHP Billiton at $150 per tonne. Should these reports turn out to be correct, it would mean a big saving for the steel maker because the price is around 50 per cent lower than what the company has been paying.

SAIL has access to captive reserves of iron ore but imports coking coal; high prices of this key input have pushed up the company’s raw material bill over the last couple of years. New contracts being negotiated at lower prices are welcome at a time when weaker demand for steel from key user sectors has resulted in the government-owned firm’s volumes falling by about 20 per cent in the December 2008 quarter. Its competitors didn’t see as sharp a drop though — volumes came off by 13 and 14 per cent for JSW and Tata Steel respectively.

However, things could look up for SAIL with Indian Railways upping its target for acquiring wagons to nearly 15,000 from current levels of 6,600. While that should go a long way in boosting demand for steel, the catch is that it could take a while before orders are placed. Prices of steel in the home market have fallen substantially — SAIL took a cut of around Rs 6,000 in the December 2008 quarter. As a result, realisations per tonne which were around Rs 46,000 in the September quarter fell sharply to around Rs 37,000, a fall of about 19 per cent. Together with lower volumes, it resulted in a fall in net sales of around fell 6 per cent to Rs 8,921 crore.

Even after trimming production, the company’s inventories haven’t been getting cleared fast enough. With demand from sectors such as infrastructure expected to pick up after the elections, the second half of 2009-10 might see volumes improve. By then, the company will also gain from lower coking coal prices and that should help improve operating margins which fell 1860 basis points y-o-y to 12.7 per cent in the December quarter. SAIL’s investment of Rs 4,000 crore for mining projects in Orissa is on track — the firm plans to turn out 26 million tonnes of steel per annum by 2010-11.