The steel ministry may be losing sleep over the steel price rise, but it’s the mining companies that are riding the profit boom.
NMDC, the country’s largest iron ore producer, which also happens to be under the steel ministry, is set to post record profits in this financial year. NMDC sources said revenue in the current financial year is likely to be Rs 9,500 crore, while net profit would be in the region of Rs 5,000 crore. That would be a significant increase over the performance in the last two years.
In 2008-09, the company had an operating profit margin of 88.91 per cent and a net profit margin of 57.80 per cent, almost four times of public sector major Steel Authority of India Ltd (SAIL).
The profit margin of NMDC is not surprising. The only major cost is the extraction cost, which is Rs 400 a tonne, while the average selling price is Rs 3,000 a tonne.
If all goes well, the public sector miner would better its 2008-09 performance on the back of higher prices. This is because the cost of iron ore has increased from $60 in March 2009 to $150 in 2010, leading NMDC to raise prices by 34-56 per cent provisionally effective April 1, over and above a 16 per cent rise in January.
Resource companies are in a much better position than its customers. In the private sector, Sesa Goa had an operating profit margin of 55.99 per cent and a net profit margin of 40.65 per cent in 2008-09.
While the government is expected to come down heavily on steel companies as they sit down to review recent price increases, the companies are likely to feel the heat of rising raw material cost.
Iron ore accounts for about 35 per cent of raw material cost for steel. NMDC is a major supplier to steel companies like Essar Steel, Ispat Industries, Rashtriya Ispat Nigam Ltd and JSW Steel.
Steel producers said the cost had increased manifold. For steelmaking through the blast furnace route, the raw material —iron ore, coking coal, ferro alloys — cost has increased 82 per cent to $521 a tonne. For the electric arc furnace route, raw material — steel scrap, ferro alloys — cost has increased 59 per cent to $575 a tonne.
Steel producers have increased prices in April by Rs 2,500-3,000 a tonne, taking the hot rolled coil (HRC) price to Rs 35,000 a tonne, but analysts feel it may not be possible for them to pass on the entire cost push to consumers.
Senior Director Deloitte India, Kalpana Jain, said margins of steel companies without captive mines would come under pressure.
“Steel companies have been able to pass on the hike, but there might be a contraction in prices in the second quarter,” she said.
An analyst said some of the steel companies without captive mines could even incur losses. “In the second half of 2008 when prices crashed, raw material prices continued to remain high as they had annual contracts, while finished product prices came down by 50 per cent. It could well be the same this time around. They have been able to increase prices in April, but it’s unlikely that they will be able to pass on the hike in the future given the demand scenario,” said a steel sector analyst.
