The company hasn’t yet reaped the full benefits of the fall in the prices of raw materials.
With steel prices coming off between the March and June quarters and volumes lower too, it wasn’t surprising that Tata Steel’s revenues slipped by just under 12 per cent sequentially to Rs 23,300 crore in the June quarter.
With raw material costs not coming down as expected, the steel maker’s overseas subsidiary, Corus, saw profitability weaken as its ebitda (earnings before interest, tax and depreciation) per tonne, dropped by about 10 per cent sequentially, to a negative $107 per tonne, in the June 2009 quarter.
As a consequence, Tata Steel’s ebitda loss was close to Rs 30 crore — in the March quarter the company had made a profit at the operating level of Rs 30 crore. But high interest and depreciation costs resulted in a huge loss before tax of Rs 2,200 crore.
Although a few contracts for raw materials have been re-priced, more are due to be re-negotiated in the next few month, so Corus should see better profitability by the end of the year.
Of course, as industry watchers point out, it’s also true that steel prices have moved down over the past month or so and steel prices would no doubt hurt Tata Steel.
However, there are those who believe prices for some products such as hot rolled coil, which are currently ruling at around $600 per tonne, may slip to around $550 per tonne over the next three months, but should recover thereafter. The Tata Steel management, too, isn’t sure about how long the better demand conditions in Europe and the higher prices for select products will continue.
Since the end of 2008, production of crude steel has risen by about 25 per cent and most stocks have been cleared. Meanwhile, prices in the home market have been more or less stable and the trend should continue.
It wasn’t surprising that the Tata Steel stock fell 5 per cent after the results announcement on Thursday, though it was steady on Friday at Rs 439. It’s true that environment remains challenging and the stock could lose further ground if steel prices drop.
However, given that the benefits of lower raw materials will start flowing in and that Corus is saving costs in several areas, Tata Steel should become far more profitable once volumes start picking up in 2010-11.
