Mumbai: Steelmaker Ispat Industries Ltd expects margin pressure in coming quarters on escalating costs of key inputs, but may not be able to pass on the entire cost to consumers, a top official said on Wednesday.
Prices of key raw materials -- iron ore and coking coal -- have surged in the last one year as steelmakers revived output after demand from automobile and construction sectors returned.
“There is a lot of pressure on prices,” Anil Sureka, executive director of finance, told Reuters over the telephone.
“We are trying to maintain results by improving efficiencies but there is a limit to that. It is difficult to pass the entire cost to customers,” he said.
Ispat, which sources iron ore from state-run miner NMDC Ltd, has seen a near 65% increase in ore prices while coke prices have risen nearly 40% on a year-on-year basis, Sureka said.
Steel prices have risen by Rs4,000 per tonne over the last one year, while the increase in raw material costs was Rs8,000-9,000 a tonne, Sureka added.
Ispat Industries, which has a steel capacity of 3.3 million tonnes, is run by Pramod and Vinod Mittal -- younger siblings of billionaire Laxmi Niwas Mittal, who controls ArcelorMittal, the world’s No. 1 steel maker.
Analysts have warned that rising costs and pressure from an inflation-wary government can offset demand and keep earnings growth muted, going forward.
India is aggressively looking to tighten its monetary policy to tame inflation from rising food and commodity prices. Annual inflation reached 9.9% in March, its fastest pace in 17 months and the central bank sees it at 5.5% by March 2011.
“We understand there is inflationary pressure but we should also understand that this (pricing) is not in our hand. If raw material price go up, we have to raise product prices. That is a key concern,” he said.
To cut costs and improve efficiencies, the company is looking to set up a coke oven plant in two years to be able to directly convert coking coal into coke, instead of importing the latter at a higher cost, Surekha said.
It is looking to raise up to Rs5 billion through a share sale to qualified institutional buyers to fund a power plant, coke oven plant and develop mines.
Ispat showed a quarterly net profit of Rs223.6 million in Jan-March compared with a loss of nearly Rs384 million a year ago as its net sales more then doubled to Rs23.5 billion.
Rival JSW Steel is also likely to swing to profit in the Jan-March quarter at Rs5.3 billion on better demand and realisations from sales. JSW will post results on 3 May.
“Last year was challenging. In fact, we had taken a shutdown at one of our blast furnaces, but now demand is good and our capacities are running at near optimum levels,” Sureka said.
The firm had an operating margin of 22-23% and expects to maintain these levels by increasing efficiencies.
At 1.18pm, shares in the firm, valued at $563.2 million, were down 0.5% at Rs20.35 in a weak Mumbai market.