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JSW Steel’s outlook depends on domestic steel price hikes

JSW Steel’s outlook depends on domestic steel price hikes
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First Published: Fri, Jan 28 2011. 12 27 AM IST
Updated: Fri, Jan 28 2011. 12 27 AM IST
The short-term outlook for Indian steel companies is dependent on the extent of price hikes, in line with international trends. That was absent in the December quarter, as is visible from the performance of JSW Steel Ltd.
Investors may wonder if this inability to hike prices is a result of contractual obligations, or is underlying steel demand not strong enough, or are steel companies fearful of the contagion effects of a steel price hike. The government will be unhappy at any move that can drive up inflation, and in the past, has even instructed steel makers to keep prices unchanged.
Also See | Steely performance (Graphic)
JSW’s saleable steel output was just 1% higher than the previous quarter, though it was 12% higher than the year-ago period. It sold more of flat rolled steel, which earns better margins compared with long products.
During the December quarter, stand-alone sales rose by 26% than a year ago, while raw material costs increased by about 43%. As a result, operating profit margin fell to 17% compared with 24%, but was flat on a sequential basis. Iron ore prices have risen by about 25% since December and spot coking coal prices are up by 20%.
JSW is hopeful that the current quarter will be different. The company hiked prices by about 3% in January, on an average, but expects to do more over the next two months. Its coking coal requirement for the current quarter is covered till March, the company said. Steel prices are up, though varying across regions, with flat steel prices in Europe up by about 10% since November, 37% in the US, 30% in Russia, though Chinese prices appear flat.
In the near term, the company’s performance depends on how domestic steel prices behave. If industrial growth numbers slip, it could cause concern.
In the medium term, capacity expansion plans will see output expand, efficiencies improve and a better product mix. There may be some impact of capitalization of these projects on depreciation and interest costs, which will reduce as the company ramps up utilization.
Thus, fiscal 2012 will see the effects of higher capacity, and it expects to produce about 9 million tonnes (mt) of steel, compared with about 6.4 mt this year to March. If prices go up and remain there, JSW’s financial performance should improve.
Graphic by Yogesh Kumar/Mint
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First Published: Fri, Jan 28 2011. 12 27 AM IST