Tata Steel: Soft steel prices slam earnings outlook in near term
1 min read.Updated: 10 Feb 2019, 10:44 PM ISTR. Sree Ram
Analysts say with inventory in India already high and production rising, a sustained rise in steel prices can be challenging
Easing demand in China and slowing automobile sales will further weigh on the demand outlook
Softening demand and the fall in steel prices have impacted Tata Steel Ltd in the December quarter.
Sales volume in India dropped 6.6% sequentially. Volumes in Europe increased. However, falling steel prices impacted realizations, contracting consolidated operating profits by 25%. The situation was exacerbated as customers postponed purchases expecting a further drop in steel prices.
However, with steel prices recovering from the recent lows and the industry entering a seasonally strong period, the company expects the fourth quarter to be better.
After the recent rise in prices, the imported landed price and domestic steel price are almost on par, says Tata Steel, indicating little scope for pricing pressure.
But there are no indications that steel prices can rise. On the contrary, the outlook on demand is subdued.
Leading steel and mining company ArcelorMittal, which released its results on 7 February, expects global steel demand to grow a modest 0.5-1% this year, from 2.8% last year.
Easing demand in China and slowing automobile sales will further weigh on the demand outlook.
Worse, with steel prices still lower, customers may reset their contract prices downwards. Besides, with inventory in India already high and production rising, a sustained rise in prices can be challenging, say analysts at Motilal Oswal Securities Ltd.
These concerns are leading to cuts in earnings estimates. Though, how much impact the subdued earnings outlook will have on stock valuations remain to be seen.
The company is in the midst of a reorganization. It is trying to hive-off its troubled European operations into a separate joint venture. It is also selling a stake in its South-East Asia operations. The transactions are expected to be completed this year, after which Tata Steel would emerge as an India-focused company, which could boost stock valuations.
Even so, a sustained recovery in steel prices is crucial for earnings and the stock. “Tata Steel has highly profitable operations in India, but its capital allocation and track record of turning around acquired assets have been poor. Both, the Bhushan Steel and Usha Martin’s steel business acquisitions have been expensive, which would drag down earnings for years," add analysts at Motilal Oswal Securities. “Thus, the stock is a play on steel prices."