With demand weakening, Corus - the UK subsidiary - could see lower profits.
The world’s largest producer of steel, Arcelor Mittal, has announced production cuts in a bid to keep prices from falling. The company, which accounts for about a tenth of the world’s production, plans to axe production by 30 per cent.
With demand slackening globally, the Tata subsidiary Corus, has little choice but to follow suit; it too is scaling back production by 30 per cent for the six months to March 2009. Steel prices are estimated to have dropped by a steep 50 per cent in the past two months and it’s hard to gauge when demand will start picking up again given the worldwide slowdown in growth.
With prices coming off, Corus’ operating profit margins (opm) could be under pressure; already margins for Corus are far lower than they are for the parent company Tata Steel. In the June 2008 quarter, for instance, Tata Steel’s opm was 49 per cent while for the consolidated entity it was just 16.1 per cent. So, lower sales volumes could hurt the company badly particularly because a fairly good proportion of its sales are made in the spot market.
Meanwhile, in the home market, JSW Steel has already announced a price cut of around Rs 5,500 per tonne to Rs 40,000 per tonne. It is also understood to have lowered its production targets for the year. It’s not clear yet what Tata Steel plans to do. In the September 2008 quarter, firm prices — up 37 per cent y-o-y — drove the top line which grew 43 per cent y-o-y to Rs 6,850 crore.
Since September, however, prices have come off by about 24 per cent to Rs 34,000 per tonne. Tata Steel has a fairly large proportion of long- term contracts and, to that extent, it is hedged. Moreover, it has captive coal and iron ore resources which helped the margins expand by 530 basis points y-o-y to 46.5 per cent in the September quarter.
However, whether margins sustain in the current environment remains to be seen. Analysts had pencilled in consolidated revenues of around Rs 1.6 lakh crore---a growth of 38-40 per cent for the current year and they had estimated net profits of around Rs 11,800 crore. It’s likely that these estimates will now be revised in the light of a weaker demand environment.
