After JSW Steel, it’s now the turn of India’s second largest steel maker — the public sector SAIL — to cut back production. The management at SAIL says the demand for long products and hot rolled (HR) coils has fallen and therefore it is scaling down production, though it doesn’t say by how much.
Already, international players including the world’s biggest steel company Arcelor Mittal and Tata Steel subsidiary Corus have both announced production cuts to the tune of 30 per cent till March 2009 given that globally, demand appears to have worsened. In the home market, JSW has been forced to delay the commissioning of production of the additional capacity at its Vijaynagar plant and has announced a 20 per cent output cut.
Strong realisations helped SAIL post a revenue growth of 34 per cent in the September 2008 quarter. However, since the company has cut prices by Rs 6,000 per tonne and volumes will also be lower now, the revenue growth may lose momentum.
In the home market, the steel prices have corrected by around 24 per cent since September 2008 to about Rs 34,000 and the SAIL management has said that profits would be impacted as a result. That’s because about 90 per cent of its revenues come from the home market.
What’s unfortunate is that the firm’s operating profit margins dropped by over 300 basis points to 21.3 per cent in the September quarter because of higher wage costs. Margins are unlikely to improve in a hurry because it will continue to use coal bought at higher prices.
Thus the raw material bill will come down only when contracts for coal are renegotiated which might not happen in the next two quarters. Even JSW saw its margins decline in the September quarter and can expect the pressure to remain till the aw material contracts are re-negotiated.
Steel stocks have plummeted; since June 2008 Tata Steel, SAIL and JSW have lost 80, 55 and 75 per cent respectively. Analysts maintain that the demand could take time to revive. At current prices though, the stocks may appear to be cheap.
