Falling steel prices will dampen Corus' profits in the second half.
The best seems to be over, for now. At half time, Tata Steel is staring at both lower prices and production at Corus. The European subsidiary, which Tata Steel acquired in January 2007, is estimated to have turned in a robust profit in the region of Rs 5,000 crore in the six months to September 2008.
Since then, steel prices have virtually halved. So it wouldn’t be surprising if Corus’ profits too dropped sharply in the second half of the year. Despite this, consolidated profits for Tata Steel, which were Rs 6,910 crore in 2007-08, could nevertheless grow reasonably well in the current year, adjusted for exceptional items.
The average price for steel, which hit a peak in July this year and was ruling at about $1,100-$1,170 per tonne in the first two quarters of 2008-09, has fallen to $600-$650 per tonne. That’s a drop of about 45 per cent. Philip Varin, CEO, Corus, doesn’t hide the fact that orders have slowed down ‘significantly’.
The Corus chief confirmed that his company had recently reduced production by about 30 per cent because slowing economic activity in Europe and the US caused demand to weaken. Of course, the customary measures to control costs are being taken but these may not help too much.
And since contracts for the purchase of raw materials will be renewed only next year, the fall in iron and coal prices will not benefit the steel maker in the immediate future. Corus contributes more than half of the consolidated profits of Tata Steel, which were Rs 8,618 crore for the six months to September 2008.
The good news is that Tata Steel doesn’t plan to scale back production in the Indian market just now. It doesn’t propose to cut prices either—the management claims its products have pricing power. Incidentally, both JSW Steel and Steel Authority of India have cut prices and JSW has even cut back production.
Tata Steel is keeping its fingers crossed that government spending will pick up, so that demand gets a boost. Consolidated revenues for Tata Steel in 2007-08 were Rs 1.3 lakh crore while the net profit was Rs 6,910 crore. In the first half 2008-09, revenues were Rs 87,756 crore.
