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Business News/ Market / Mark-to-market/  Tata Steel: not much hope in the second half
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Tata Steel: not much hope in the second half

Price trends, cost of purchasing coking coal could continue to affect performance in the second half

A file photo of a Tata Steel plant in Jamshedpur. The firm’s consolidated sales during the September quarter were virtually flat, on a sequential basis, rising by 0.01%. Photo: AFP (AFP)Premium
A file photo of a Tata Steel plant in Jamshedpur. The firm’s consolidated sales during the September quarter were virtually flat, on a sequential basis, rising by 0.01%. Photo: AFP
(AFP)

The September quarter was one that Tata Steel Ltd’s investors would like to forget. Their expectations were not great to begin with. Slowing economic growth in China and the European Union has hit global steel makers hard and Tata Steel’s European operations were expected to be affected as a result.

In India too, demand has slowed down, but this business has traditionally outperformed. On the bright side, output has risen. But higher coking coal purchases, as part of its expansion plans, saw costs soar, while realizations have been declining, combining to affect the company’s profitability.

The times are inopportune. The December quarter traditionally sees weak demand and output conditions in Europe due to winter. And, Tata Steel’s domestic purchases of coking coal will taper from the March quarter onwards, as its own facility is expected to start operations in December 2012.

The silver lining is that raw material prices have stabilized—both coking coal and iron ore prices have fallen sharply—which the company expects should provide a floor under steel prices too. If that happens, and if prices move up, it should signal some relief for Tata Steel.

The company’s consolidated sales during the September quarter were virtually flat, on a sequential basis, rising by 0.01% to 33,867 crore, but it incurred a loss of 205 crore compared with a net profit of 1,416 crore in the June quarter. The European operations take a fair share of the blame, as it incurred an $8 million ( 44 crore at current rates) loss at the Ebitda level compared with a profit of $171 million in the June quarter. Ebitda, or income before interest, taxes, depreciation and amortization, is a key indicator of profitability.

This is despite volume sales rising and a favourable trend in raw material prices, showing the impact of declining price realisations. Sequentially, per tonne realizations in Europe were down by 7%. In India, realizations were down by 5.6%, and though volume sales were up by 8.8%, its Ebitda declined by 4.4%.

The second half does not hold out much hope for a significant improvement. Domestic output will be healthy, but price trends and the cost of purchasing coking coal could continue to affect performance. Winter will affect the performance of its European operations.

The year-end may see the trend change. Coking coal purchases will taper, lowering the impact on its costs.

China could be the surprise factor, especially if its economy makes a faster or bigger than expected turnaround. A pick-up in steel prices will see investor sentiment turn around very quickly. Otherwise, the overhang over the steel industry is likely to weigh down on the stock as well.

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Published: 11 Nov 2012, 02:36 PM IST
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