Rising costs, inflation will pressure margins of steel firms

The global steel industry has in recent years, been buoyed by robust demand from strongly growing economies of the BRIC (Brazil, Russia, India and China) countries, especially China. Steel demand in India has grown an average of 13% yoy since 2005 owing to strong and steady economic growth resulting in rise in demand from infrastructure, construction, engineering and auto sectors.

Although, consequently, steel prices have risen steadily since 2006, prices have seen a particular surge since January 2008 driven by input prices. Iron ore and coking coal, which comprise more than 60% of cost of steel, have risen 66% and 92% respectively in the period January-May 2008 compared to average 2007 prices. The strong demand for steel has enabled steel manufacturers to pass the input hikes to customers resulting in a 21% increase in hot rolled coil prices and a 19% increase in cold rolled coil prices.

The cost-push effect on steel prices has dominated the demand-pull effect, resulting in a marginal 1-1.5 basis points yoy rise in profit before interest, lease rent, depreciation and tax (PBILDT) in FY08, of the top five steel manufacturers in India by capacity, despite the increase in gross realizations. The full impact of the raw material price rise on profitability is expected to be seen in 1HFY09. CARE expects Indian steel manufacturers’ profitability to dip in FY09 if coking coal and iron ore prices continue their upward trend