Despite price pressures, de-bottlenecking of operations and cost cutting will help maintain earnings.
The pressure on steel companies is expected to remain strong. Recently, steel companies announced a cut in prices. With global demand looking subdued due to monetary tightening in China and the Europe crisis, steel prices in the international market, especially of flat products, have shrunk to $620 a tonne from $750.
There is excess supply of flat products in the domestic market and steel makers are mulling further price cuts. SAIL has already slashed prices by Rs 1,500-2,000 per tonne for longs and by Rs 1,000-1,500 for flats, citing de-stocking activity in the market. Moreover, there are varying reports suggesting a 13 per cent rise in coking coal prices and a 20-25 per cent surge in iron ore prices, which can hit profitability.
SAIL, however, will bank on improving capacity and de-bottlenecking of operations. The company has spent Rs 10,600 crore in FY10 while Salem Steel’s expanded capacities are to be commissioned by the second quarter of the current financial year. It has a capex outlay in excess of Rs 12,000 crore for the next three years. Complete benefits from capacity expansions will accrue from FY10. On costs, especially of key input coking coal, SAIL is now contracting 95 per cent of its requirement from 90 per cent in the past. For iron ore, it has secured mining lease of Rowghat mines and is working on renewal of lease for Chiria/Gua mines in Jharkhand that have 810-million-tonne reserves.
Moreover, consumption rates are slated to go down, as the company moves from old production methods to continuous casting, which will translate into savings.
Rollback of salary hikes and reduction in the number of employees during 2010 have already strengthened the company’s account books. It is looking at further reduction to reach a headcount of 1,00,000 employees. This should secure operations for the company, unless capacity expansions get delayed and the expected volume growth does not happen.
