By Swati Pandey / Reuters
Mumbai: Steel firms, struggling with squeezing profit margins and higher input costs, face yet another challenge as the central bank tightens the noose on monetary policy, making borrowing dearer.
Rising prices of key raw materials such as iron ore and coking coal, coupled with pressure from the government to keep local rates down has forced steelmakers to absorb the costs, even as global steel prices rose 50% in 2008.
Inflation in India rose to 11.42% in mid-June, the highest in more than 13 years. The central bank raised its key lending rate and cash reserve requirements for banks should keep with it by 50 basis points, prompting banks to raise lending rates.
“Interest rates are going up so interest cost on working capital finance will also go up immediately,” MVS Seshagiri Rao, finance director at JSW Steel Ltd said, adding that the firm may have to defer fresh projects for which it is seeking funding.
Steel makers such as JSW Steel, Jindal Steel and Power and Bhushan Steel Ltd are concerned the hikes will hurt working capital funding, impairing plans to buy coal and iron ore mines and raise capacities to cut costs.
“Interest costs for working capital will rise by the same extent as the cash reserve ratio,” said Ankit Miglani, director-commercial of Uttam Galva Steel.
Steelmakers have been battling costs since May after the federal government urged domestic steel makers to hold prices for at least three months to rein in inflation.
The companies, which reported profits in the January-March quarter, said earnings would fall and operating margins would shrink in the subsequent quarters due to cost pressures.
JSW Steel’s net profit grew 12% in the Jan-March quarter to Rs4.5 billion compared with a 23% fall in the October-December quarter, while Bhushan Steel recorded a 30% rise in profit, compared with a 64% jump in October-December.
Net profit at Jindal Steel and Power, which boosted capacity in FY08, rose over 90% to Rs3.9 billion in the January-March quarter compared with 64% in the October-December period.
Shares in steel firms have fallen between 24-70% so far in 2008. The BSE Metal Index, which includes steelmakers and aluminium firms has shed 31%, in line with the BSE index’s 30% drop.
Jindal Steel and Power and Uttam Galva Steels, which have projects in the works, said they will continue with them even though the hikes will affect them in the short-term.
“We are going ahead with expansion and addition of facilities. These are short-term measures,” Director Sushil Maroo said refering to the monetary tightening. “Our expansion is based on long-term plans.”
Still, for some steelmakers, higher interest rates is yet another hitch to business.
“Term loan rates will rise eventually. It would be a big challenge for the industry. Our margins would be under tremendous pressure,” said JSW’s Rao.