Flat Producer JSW Steel to Churn Higher Margins as Against State-Owned SAIL

Flat steel products find wide application in automobile sector, while long products are used in construction and infrastructure segment

Flat steel producers such as JSW Steel might churn higher margins in the September quarter as against long steel makers like state-owned Steel Authority of India (SAIL), on the back of increased volumes. This comes amid a lag benefit from low-cost inventory in coking coal for all domestic steel players.

“Though July-September is typically a lean season for overall domestic steel demand, consumption from the local automobile industry has been relatively better, along with exports, compared to the corresponding period last year,” said Rahul Prithiani, director at CRISIL Research. “On a year-on-year basis, volume demand is expected to have gone up 10 percent in the domestic market.”

Flat steel products find wide application in the automobile sector, while long products are used in the construction and infrastructure segment. The domestic 40-million tonne long products market is dominated by secondary steel producers but among the main producers, SAIL holds the largest share. Tata Steel, Jindal Steel & Power, Essar Steel and Bhushan Steel are the other large primary producers.  

Experts think the margin in the flat steel products business would be about Rs 2,500 a tonne higher in the September quarter from the earlier one. While the long products business would remain under pressure in terms of volumes and realisations, seeing a sequential increase of about Rs 1,000 a tonne.

“No construction activity takes places in this season between July to September and, hence, the long products business division of companies will not witness much margin expansion. On the other hand, exports of flat products have been strong and realisations have also picked up due to better international prices. This will help domestic flat producers in the quarter,” said a senior analyst, on condition of anonymity.

For the domestic steel industry overall, realisations are seen higher in the September quarter, as prices have in line with the trend abroad been moving up since August.

Currently, the domestic price is Rs 40,750 per tonne, up almost 10 per cent from two months earlier. 

Overall, the flat products business will have an upper hand over the long products business. 

Experts say the extent of benefit will also be dependent on coking coal price purchase contracts of individual companies.

“Since coking coal prices have been volatile in the past few months, at what level the coal has been contracted by steel producers becomes crucial to figure the extent of cost hit in the quarter,” said Jayanta Roy, group head of corporate sector ratings at ICRA.

Responding to the high volatility of coking coal prices since April, domestic steel companies have been lifting coking coal in the spot market unlike earlier quarterly contract mechanism. Prices of coking coal, which are currently at around $200 per tonne are expected to give a $15-$20 per tonne lag benefit to domestic steel producers with a maintained inventory. Iron ore and coking coal are the key raw materials used in the making of steel and contribute significantly in the cost of production of the alloy.

Most of domestic steel producers import coking coal to meet their requirement and follow international pricing trend.

 

Reference - http://www.business-standard.com/article/companies/flat-producer-jsw-steel-to-churn-higher-margins-as-against-state-owned-sail-117092600421_1.html