Steel cos may see margin pressure

CNBC-TV18’s Executive Editor, Udayan Mukherjee - Alcoa’s earnings were very disappointing and you need to be worried about what’s going on with metal stocks from here on. I know that people are bullish on certain aspects of the metal cycle but the margin pressures are probably underestimated now even today. There is a lot of talk about integration in metal companies etc but there is some news, which is doing the rounds in from the global markets that Posco might have signed contracts in coking coal which is 200% higher than the ruling price at Rs 12,000/tonne. That means coking coal prices would have trebled in Posco’s contracts.

Those things, those problems will all come to our shores as well and while there might be certain amount of iron ore safety which are few of the integrated steel companies might have out here. I doubt if there is a lot of safety in the coking coal prices because a lot of companies import and buy a fair amount of coking coal and that’s a fairly key ingredient for a lot of steel manufacturers. For example I don’t think JSW Steel has much of coking coal at all. I don’t think Tata Steel or SAIL have a lot of coking coal or more than 30-40% coking coal security.
 
So a short point is that these raw material things are going in a completely tailspin kind of situation and this morning government owned National Mineral Development Corporation (NMDC), despite of all the talk of cooling down steel prices, says they want to hike their iron ore contracts by 60%. So these are disturbing signs for margins for companies, which have no pricing power in this market.

Forget price cuts, I don’t think as the Steel Secretary was telling us yesterday maybe they will not lean too heavily for price cuts. But in a situation where your cost is only going up and up, and if your prices remain stagnant and they would be stagnant for sometime now, what happens to your operating margins.
 
So there are serious worries about margin pictures, of course, the owners of these commodities like coking coal like Gujarat NRE Coke will be smiling all the way to the bank and the market is savvy enough to figure that out. You have seen what is being going on, Gujarat NRE Coke is going up at the rate of 10% a day and steel prices have corrected 20-25% in the last fortnight month.