Tata Steel margins face input-cost rise pressure

Tata Steel, bracing for an 80-90% rise in the prices of raw materials, sees margins under pressure.

With annual contracts with raw material suppliers becoming quarterly in nature, the steelmaker feels that price hike is likely every quarter.

HM Nerurkar, the company’s managing director, said on Monday that taking the Japanese contracts as an industry benchmark, the price of coking coal could increase from $125 per tonne at present to $220 while the iron ore prices could move up from the present $65 per tonne to $110 in the first quarter itself.

This would affect the company’s European operations for which it has to depend fully on imported raw materials.

Nerurkar said the cost impact of the increase in raw material prices at its European operations could be $140-150 per tonne of steel.

On the domestic front, Nerurkar said the company sources iron ore from its captive mines but has to depend on imported coal for up to 55% of its entire coking coal requirement, and would be impacted to that extent.

Consequently, borrowing costs could also rise. “There could be a significant impact on borrowings,” Nerurkar said.

He said that margins for steel manufacturers will be under pressure for not only the rising raw material prices but also because of the glut in the global market to the extent of 1.2 billion tonne.

Tata Steel expects its sales to touch 10 million tonne in 2012-13, Nerurkar said. In 2011-12, it expects sales to increase 10% by 0.6-0.7 million tonne (mt). Overall sales in 2009-10, at 6.170 mt, grew 18% against 5.232 mt in 2008-09.

The company’s saleable steel output, at 6.44 mt, is expected to rise to 6.92 mt in 2010-11.

Tata Steel will invest Rs15,000 crore to set up a blast furnace of 3 million tonne per annum capacity and a pellet plant of 6 mtpa capacity among others. Orders worth Rs13,000 crore have been finalised.

Indian steel demand is expected to grow by 10% in 2010-11 to 59 mt against 54 mt in 2009-10. Demand will be driven by auto, infrastructure and construction segments.

Domestic steel production is expected to touch 90 mt by 2015.
China and India are the two centres of steel demand. Global demand in 2010 is 70% of the installed capacity.