Worst appears to be over for steel makers for now
Crystal Barretto, ET Bureau Feb 27, 2012
Crystal Barretto, ET Bureau Feb 27, 2012
The worst appears to be over for Indian steel makers, at least in the short to medium term, as domestic steel prices have improved and raw material costs have come down. Moreover, the rise in the rupee has made coal imports that much cheaper.
This means that steel manufacturers are likely to report an expansion in operating profit margins for this quarter. But this may be already factored into the current market price of steel stocks as the longer term outlook is not very encouraging.
Domestic steel prices, as measured by the Indian Steel Price Index, are about 7% higher than the year ago period. This is an improvement of about 4% since the October-December 2011 quarter. Currently, the price of iron ore in the international market is $154/tonne, 3% higher that last year.
Contract coking coal is at approximately $235/tonne, 4% higher than last year. For the first time in three quarters, the rise in finished steel in greater than the rise in raw materials, iron ore and coking coal. This will improve margins of steel makers.
Since July, margins of most domestic steel makers have come down by 800-1,000 basis points due to shortage of iron ore locally, higher cost of international iron ore and coking coal and the rupee's depreciation. Since about 70% of the steel industry is dependant on imported coal, the cost of production for non-integrated companies has shot up significantly. SAIL was one of the worst hit.
Companies like JSW Steel and others, which have foreign currency borrowings, reported losses on account of the fall in the rupee. These losses will be reduced next quarter as the rupee has appreciated about 3% since December 2011.
Steel stocks as measured by the ET Metal Index have soared over 35% since the beginning of January 2012. Industry leaders SAIL, Tata Steel, Jindal Steel and Power and JSW Steel are trading at 12.36, 5.01, 15.0 and 31.72 times their trailing 12-month earnings per share, respectively.
This means that steel manufacturers are likely to report an expansion in operating profit margins for this quarter. But this may be already factored into the current market price of steel stocks as the longer term outlook is not very encouraging.
Domestic steel prices, as measured by the Indian Steel Price Index, are about 7% higher than the year ago period. This is an improvement of about 4% since the October-December 2011 quarter. Currently, the price of iron ore in the international market is $154/tonne, 3% higher that last year.
Contract coking coal is at approximately $235/tonne, 4% higher than last year. For the first time in three quarters, the rise in finished steel in greater than the rise in raw materials, iron ore and coking coal. This will improve margins of steel makers.
Since July, margins of most domestic steel makers have come down by 800-1,000 basis points due to shortage of iron ore locally, higher cost of international iron ore and coking coal and the rupee's depreciation. Since about 70% of the steel industry is dependant on imported coal, the cost of production for non-integrated companies has shot up significantly. SAIL was one of the worst hit.
Companies like JSW Steel and others, which have foreign currency borrowings, reported losses on account of the fall in the rupee. These losses will be reduced next quarter as the rupee has appreciated about 3% since December 2011.
Steel stocks as measured by the ET Metal Index have soared over 35% since the beginning of January 2012. Industry leaders SAIL, Tata Steel, Jindal Steel and Power and JSW Steel are trading at 12.36, 5.01, 15.0 and 31.72 times their trailing 12-month earnings per share, respectively.
Courtesy: The Economic Times
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