Steel firms may up prices several times next fiscal

Steel companies are likely to dance to the tunes of high raw material prices and opt for several rounds of upward price revisions next fiscal.

Experts say while the watermarks of Australian floods will refuse to dry on coking coal prices, even iron ore prices will stay firm due to Chinese demand.

“If we talk about the calendar year 2010, steel had underperformed other commodities, many of which scaled an all-time high. So, it is going to be the year of steel,” said Ramesh Iyer, vice president - product development, National Commodity and Derivatives Exchange Ltd (NCDEX).

In June 2008, steel prices touched a high of Rs38,000 per metric tonne and subsequently went to a low of Rs17,500 per tonne. On an average, the prices stayed at Rs24,000 for the entire period of the calendar year.

“I will not be surprised if prices peak to Rs32,000,” he said and added that the average for the calendar year 2011 is expected to be Rs29,000.

Therefore, in a bid to protect their margins, the companies may increase steel prices in steps, throughout the year, to offset the impact.

Coking coal and iron ore are the two main raw materials required in steel manufacturing. Coking coal, after being converted into coke, is poured into a blast furnace, along with iron ore, where it is burnt to produce heat, which melts the iron ore and refines it off its impurities. To produce one tonne of steel, almost 1.6 tonnes of coking coal and 1.8 tonnes of iron ore is required.
Due to the impact of high prices of both the raw materials, companies are expected to be under pressure to either pass on the cost or take a hit on their margins.

“Both iron ore and coking coal/coke prices have increased significantly in the second half of CY2010. Coking coal prices being particularly impacted by supply-related concerns following the Australian floods,” said Jayanta Roy, senior vice president, corporate sector ratings, ICRA Ltd.

He said in future backward-integrated steel players such as Tata Steel and JSPL are likely to enjoy better profits and cash flows in the near term, since they have captive iron ore and coal mines.

SAIL also would benefit partially, having captive iron ore sources. 
But for non-integrated players, the extent of margin expansion would be capped by the price at which they would be able to source raw materials from the market.

The high prices will be complimented by a reviving market in the Western world in the next fiscal, which in turn will enhance the demand for steel.

According to World Steel Association, world crude steel production reached 1,414 million metric tons (mmt) for the year of 2010. An increase of 15% compared with 2009 and is a new record for global crude steel production. This is expected to even exceed in this year, say analysts.

Vibhu Ratandhara, assistant vice president, Bonanza Commodities, said, “The UK crisis is almost over and the US data is also fantastic. Therefore, 2011 is expected to be a year of firm steel prices, backed by a firm demand.”
Therefore, in the light of high prices, if companies do not pass on the costs, they have to utilise their assets more efficiently.

Analyst Abhijit Mitra from brokerage firm ICICI Securities, in a January 14 report on the steel industry, said, “With unexpected raw material inflation, steel majors will face renewed pressure on working capital cash outflows. Hence, to improve or even maintain return on equity, and to meet interest outflow obligation, focus will be again on asset utilisation, which will strain prices. Thus, steelmakers will face great difficulty in passing on raw material prices.”

“And this will have a ripple effect on almost all sectors, right from automotive, construction to consumer durables,” said Rahul Sonthalia, vice president, portfolio management services, MPA Financial Services Limited.

So, there is no respite for the common man, from an already burdened pocket with double-digit inflation.