Steel price hold to hit SAIL, JSW hard

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Steel price hold to hit SAIL, JSW hard

SAIL and Tata Steel have decided to hold steel prices for next 2-3 months following Prime Minister Manmohan Singh's request. JSW Steel has made a similar announcement. But this is going to hit firms like SAIL and JSW Steel hard as these firms don’t have recourse to captive mines and raw material prices soar, a CNBC-TV18 analysis shows.

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By Kanchi Gandhi /CNBC-TV18

SAIL and Tata Steel have decided to hold steel prices for next 2-3 months following Prime Minister Manmohan Singh's request. JSW Steel has made a similar announcement. So, what does this mean for the steel sector?

Steel producers are forced to pay a huge price for coal and iron ore. In fact, iron ore prices are up over 67% while coal prices have increased to USD 300 per tonne from USD 96 per tonne in one-year.

Indian steel companies have upped prices up 30% in 2008. So, how do they stack vis-à-vis international players? Hot Rolled Coil, or HRC, prices in the US are up 46% while Cold Reduced Coil, or CRC, prices are up 42% since December last year. European HRC prices are up 51% while CRC is up 42% since December.

Posco has announced a 21% hike in HR prices immediately after an above 200% hike in coking coal prices. Nippon Steel has announced a 10% hike in construction steel in March. While Baosteel has announced a 20% hike in February to cover iron ore costs. The company plans to hike prices further.

Integrated companies like SAIL and Tata Steel are partly insulated from raw material cost hikes as they have control over captive iron ore. However, non-integrated firms like JSW Steel and Corus are expected to be under margin pressure.

The rise in coking coal prices will take a toll on margins of steel companies. SAIL will be hit due to escalating coking coal prices, which accounts for 69% of raw material costs. This would rise to 78% post the price revision. Tata Steel's dependence on imported coking coal stands at 35%, so it less affected by the price hike.

On the other hand, JSW Steel has only 25% captive iron ore mines. It does not have any operational captive coking coal mine. The pressure from high input costs is already visible in its Q3 FY08 results. The company's margins have slipped to 27% from 33.4% YoY.