Mumbai: India’s third largest steel producer JSW Steel Ltd says profit margins will shrink in the financial third quarter as the global recession cuts demand and prices.
The ratio of earnings before interest and tax to sales will shrink from 30% in the three months ended 31 December last year, finance director Seshagiri Rao said in an interview on Monday, without giving a number. Steel prices have fallen 50% from their June peak to about $600 (Rs29,100) a tonne, he said.
The economic slowdown is prompting steel makers including ArcelorMittal, the world’s largest, to trim output. JSW reduced production 20% last month as waning demand from car makers and contractors of industrial projects forced it to lower prices to clear stockpiles.
Under pressure: The Jindal Steel plant in Hisar, Haryana. The company is looking at emerging markets to beat the slowdown and aims to lower costs by one-third this fiscal to ease pressure on margins. Rajeev Dabral / Mint
Steel prices are unlikely to be revised upward, said Niraj Shah, an analyst at Centrum Broking Pvt. Ltd in Mumbai with a hold recommendation for the stock. The high cost of coal, likely to prevail until March, will further depress margins. JSW Steel shares rose 1.9% to Rs222.85 in Mumbai trading on Tuesday. The stock has lost 83% of its value this year, worse than the 53% slump in the nation’s key stock index, on concern demand in India will remain subdued.
Growth in steel industry sales in India will decline to about 6% this year from 13% in 2007, Rao said. JSW is looking at emerging markets to cope with the slump, he said.
“Our presence in 74 countries helped us counter the slowdown in India and the US,” Rao said. “We have increased our shipments to markets such as Africa, Bangladesh and Sri Lanka.”
JSW’s second quarter profit declined 38% to Rs317 crore, the second straight quarterly drop. Profit margins in the period contracted to 21% from 31% a year earlier, Rao said.
The company will announce earnings for the third quarter next month. JSW aims to lower costs by one-third this fiscal to help reduce pressure on profit margins, Rao said. The Mumbai-based company has also benefited from falling prices of raw materials such as coal and iron ore, he said.
Iron ore prices for immediate delivery have fallen to $55 a tonne from about $160 a tonne in January, he said. JSW buys half its ore on the spot market. To further cut costs, the company is importing coking coal to produce coke at its own plants, he said. JSW may get 2 million tonnes of coking coal next year from its Mozambique mines, which it acquired in 2007, Rao said. Prices of iron ore under long-term contracts may drop 40% next year, UBS AG has forecast, while coking coal may drop 33% to $200 a tonne in the year starting 1 April, according to the median forecast of analysts surveyed by Bloomberg on 1 December.
JSW expects hot-rolled steel to trade at $600 a tonne in the next few months.
“I don’t expect prices to fall,” Rao said.