Steel firms expect good Q4, but outlook dim

While steel companies are expecting to post good bottomline and topline growth in the fourth quarter on the back to strong product prices, experts see the numbers slipping in the beginning of the new fiscal.

“The companies will be much better off in the quarter that just ended than the third quarter of the last fiscal, especially with the steel prices rising substantially in the last three months,” said an analyst with a leading domestic brokerage house.

He said while the companies increased steel prices as much as Rs1,500 per tonne in the fourth quarter, prices of coking coal and iron ore — the main raw materials in steel making — remained under some check and this will reflect as rise in margins.

However, the good run will not spill over into the current quarter as companies have already contracted coking coal for April-June at higher prices in January when floods in Australia submerged mines severely affecting production.

“While the companies will be tempted to go ahead with a steel price revision, they will still have to take a hit,” he said.

Analyst Bikash Bhalotia and team from brokerage house Pinc Research, in an April 5 report on the metals sector, said, “Cost push (on raw materials rose to historical high on adverse weather conditions in Australia) led to a rise in steel prices since December 2010. We expect this to result in a quarter-on-quarter margin expansion for steel companies in Q4 of the last quarter, as impact of recent hike in raw material is expected to come through in the first quarter of the current fiscal.”

An Essar Steel spokesperson said Q4 was much better than Q3 due to good demand, firm prices and no major spike in raw material cost in Q4 was witnessed.

“The coking coal price, on an average, has risen from $228 per tonne in the last quarter to $330 per tonne for the April-June quarter. The steel companies will not be able to pass on the entire cost to consumers and will take a hit on their margins,” said a senior metals analyst.

He said iron ore prices, however, remained stable, rising a mere $10-15 per tonne in the fourth quarter over the third quarter prices and hence will not impact the fourth quarter numbers.

Going forward, there are not many triggers for iron ore prices to move substantially.  Unlike coking coal, companies have some sources of backward integration for iron ore and hence have cost control.

“Out of the three major players, Tata Steel is expected to post the best numbers due to its integration. Steel Authority of India Ltd (SAIL) will be moderate and JSW Steel will not see a great margin increase because of its poor backward integration,” the senior analyst said, but added that Tata Steel Europe’s (TSE) numbers will not be attractive.

Bhalotia and team said although realisation for TSE may not increase in line with rise in steel prices, they expected Ebitda/tonne to increase to $65 ($25 in third quarter), boosting consolidated results.

Analysts Sanjay Jain and Tushar Chaudhari, from Motilal Oswal Securities in a report on Friday said they expected fourth quarter sales volumes of 1.7 mt (up 12% YoY) for JSW, 3.5mt (up 3%) for SAIL and 1.75 mt (up 3%) for Tata Steel.