Structural contraction in demand at Tata Steel?

Demand from key industries such as infrastructure and auto remain weak and the recovery is expected to be protracted
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First Published: Wed, Feb 13 2013. 08 15 PM IST
Volume rose 9.25%, helped by increased production in Jamshedpur’s expanded capacity, but realizations fell by more than 6% and earnings before interest, taxes, depreciation and amortization margin declined 220 basis points sequentially. Photo: AFP
Volume rose 9.25%, helped by increased production in Jamshedpur’s expanded capacity, but realizations fell by more than 6% and earnings before interest, taxes, depreciation and amortization margin declined 220 basis points sequentially. Photo: AFP
Updated: Wed, Feb 13 2013. 09 01 PM IST
Tata Steel Ltd missed already weak expectations for the December quarter, as multiple factors hit the company’s performance. It reported a loss of Rs.763 crore, more than 10 times consensus estimates. According to Thomson Reuters StarMine Smart Estimate data, polled analysts had estimated a loss of Rs.74.5 crore.
Steel demand continued to slide, with the company’s chief financial officer Koushik Chatterjee describing the contraction in demand as “pretty significant and even structural”. Demand from key industries such as auto and infrastructure remain weak and the recovery is expected to be protracted.
Steel deliveries in Tata Steel’s European operations fell 11.7% quarter-on-quarter to 3.02 million tonnes. Average price realization in European operations turned out to be flat, but that’s primarily because of a change in product mix. Like-to-like pricing fell. According to the company, the drop in selling prices last quarter affected its Ebitda (earnings before interest, taxes, depreciation and amortization) by $118 million (around Rs.636 crore). Even raw material prices fell, leading to savings of $94 million, but lower volumes and the drop in selling prices resulted in an expansion in Ebitda losses to $78 million, which was $7 million in the September quarter.
The performance of Tata Steel’s India operations disappointed as well. Volume rose 9.25%, helped by increased production in Jamshedpur’s expanded capacity. But realizations fell by more than 6% and Ebitda margin declined 220 basis points (bps) sequentially. One basis point is one-hundredth of a percentage point.
On Tuesday, Steel Authority of India Ltd reported a 42 bps improvement in Ebitda margin, despite reporting an over 10% fall in price realization as it managed to offset input cost pressures with savings on fuel costs and employee expenses. Tata Steel India, of course, has been struggling on the costs front because of a higher proportion of purchased coking coal. Interestingly, raw material costs as a percentage of sales were almost flat last quarter, while the drop in margins was due to higher fuel, freight and employee costs.
All told, the December quarter earnings were disappointing. According to Chatterjee, there are a few positives which will help the company post growth in the March quarter. First, there won’t be the seasonal weakness typically seen in the December quarter, which will also result in a more stable pricing environment. He also said customers have begun re-stocking, thanks to steel inventory reaching extremely low levels, and it will help volume growth. Besides, one of the company’s blast furnaces, which had been shut for an upgrade, is now operational. Having said that, the fact remains that capacity utilization remains weak in the global steel industry and, while the March quarter will look better than the December quarter, it can’t be seen as a meaningful recovery. It’s little wonder steel stocks continue to languish.
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First Published: Wed, Feb 13 2013. 08 15 PM IST
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