Last week brought fresh clues that the December quarter results of steel makers may come in below expectations. In October, South Korean steel major Posco had revised downwards its guidance for 2010. Based on its annual guidance, it should have earned an operating profit of 800 billion won (Rs 3,255 crore). Not only did Posco’s operating profit fall below analyst expectations, but at 653 billion won, came lower than its own revised estimate.

Tata Steel Ltd, in its December quarter production update, went beyond the usual output-related information and sounding a warning. It said group volumes will decline marginally, net sales will be flat compared with the September quarter and operating results are likely to be lower. When Steel Authority of India Ltd (SAIL) announced its results on Thursday evening, not surprisingly, it came below estimates.

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Local demand for steel has been strong, which is visible in SAIL’s saleable steel output rising by 5% over the year-ago period, and 8% on a sequential basis. In value terms, revenues rose by 15% to 11,313 crore, partly due to higher prices, which should have ordinarily made this a good quarter. But SAIL’s raw material consumption costs rose more sharply, up by 47% to about 5,300 crore. This is seen even on a sequential basis; while revenues rose by about 5%, input costs rose by 10%.

SAIL attributed the hike chiefly to the impact of higher imported coal prices. Other input costs have been rising, too, but not by as much. As a result, the company’s operating profit margin (OPM) fell to about 16%, compared with 26% a year ago. OPM was still at the same level as the previous quarter. Analyst expectations were for its net profit to be about 1,300 crore, and not the 1,110 crore that it actually made.

SAIL’s key problem seems to be the rising cost of coal, and the inability to hike prices to fully recover it. It imports nearly 70% of its coking coal requirement, and most of it comes from Australia. Its coal-related problems don’t seem to be ending too soon.

While iron ore and coking coal prices have been on the rise in recent months, floods in Australia have hit coking coal exports. Coal prices are expected to rise further, which will reflect in contract prices for the June quarter.

The indications from companies are that the pricing environment is not strong enough, which will force companies to absorb the costs in order to preserve volume growth. This seems to suggest that times will continue to be tougher for steel companies such as SAIL for some more time.

SAIL’s share price fell by about 7% on Friday, when the market was down by 1.7%. That underperformance is likely to continue till the ground situation changes.

Graphic by Ahmed Raza Khan/Mint

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