Good tidings may continue in Q4 for steel firms

Strong quarterly earnings in the last three quarters in a row by domestic steel makers is likely to continue in the fourth quarter of the 2004-05.

Sector analysts expect major steel makers in the country to post net profit growth of around 100 per cent in the quarter ended March 2005.

Posco, the world's fifth largest steel maker, indicated yesterday that realisation in the steel industry continues to be buoyant after it posted a better-than-expected 82 per cent jump in its profits for the January-March 2005 quarter.

The domestic steel companies posted a whopping 168 per cent rise in net profit in the nine months ended December 2004, with Tata Steel, Steel Authority of India (SAIL) and Jindal Iron recording over a 100 per cent jump in net profit.

Essar Steel, Ispat Industries and Mukand Iron managed a smart turnaround, while Sunflag Iron & Steel recorded over a 1000 per cent growth in net profit in the first nine months of the fiscal 2004-05.

For the quarter ended March 2005, analysts at Motilal Oswal Research expect steel companies to post robust results. Tata Steel is expected to report a 21.3 per cent growth in net sales in the fourth quarter, on the back of a 17 per cent increase in realisations. Sales volume is likely to decline by 3 per cent due to the shutdown of a blast furnace in the course of the year.

Operating margin for the quarter is likely to increase by 4.5 percentage points to 41.5 per cent, while post-tax adjusted profit is likely to grow by 48 per cent.

SAIL's net sales are expected to grow by 25 per cent in the fourth quarter, driven by a 15.3 per cent growth in realisations and a 10 per cent growth in volumes. Operating margin for the quarter is likely to increase by 13.9 percentage points to 36 per cent, and post-tax adjusted profit is likely to increase by 112 per cent.

Jindal Steel and Power is likely to post net sales growth of 37 per cent in the fourth quarter.

The results shown by South Korean giant Posco in the quarter ended March 2005 and an expected robust show by domestic companies in the fourth quarter should be read with a caveat: earnings could be dampened over the next couple of quarters as global steel prices stabilise, analysts said.

The outlook for steel companies for fiscal 2005-06 is not so rosy on account of softening of global steel prices. Chinese import prices for hot-rolled coil have been dipping since February, after they surged 72 per cent over the previous 12 months. US steel prices are also going downward.

The steel companies have been enjoying strong earnings since last year, helped by robust global demand and strong international steel prices, despite increasing raw material costs.

Manufacturers were able to pass on the increase in iron ore prices to customers. Steel prices remained firm on the back of extremely tight supply in almost all the major markets (except Europe and the US, where de-stocking of inventory resulted in marginal weakening of prices).

The steel companies, however, would see a major cost push in calendar 2005 on account of a rise in iron ore prices. Steel producers, who were anticipating a price increase of 30-50 per cent, have conceded a hefty 71.5 per cent increase in iron ore prices.

The coking coal prices too are likely to move up, with most producers agreeing to at least 100 per cent increase in long-term contract prices for coking coal.