How Raw Material Price Hikes Put Tata Steel’s Profits Under Pressure

At the start of 2012, steel majors like Tata Steel had hoped that there would be some kind of revival in the international growth story, and thus in the buying of steel, but by the third quarter of the year, it has become abundantly clear that that is not going to happen.

Thus, most Indian steel companies are confined to selling their product internally. But this has been no easy task, with the various pushes and pulls.

The prospects for Indian steel companies that had looked bright at the beginning of 2011 turned bleak towards year-end. This was mainly due to sluggish sales coupled with high input costs such as coking coal and iron ore that exerted pressures on the companies’ bottom lines.

Last year, too, was not a good year for the Indian steel story. Indian steelmakers bore the brunt of high raw material costs. Imported metallurgical coal, especially from Australia, had become that much more expensive because of mine flooding in Queensland, Australia. Profits were under pressure as a result.

Now, according to a report in the Global Times, a recent stimulus package announced by China for its infrastructure sector, added to a cut in production of high-cost coal by Australian miner BHP Billiton, was likely to jack up the prices of Indian coking coal.

Contract prices of coking coal, USD 170 a ton for the October-December quarter, were set to go up by at least $10 a ton in the January-March period. The reduction in production from BHP, too, was likely to impact production because India is one of the largest coking coal importers from Australia after Japan, and accounts for 20 percent of the total coal exported by Australia.

Thus, a cut will result in short supply of metallurgical coal for Indian importers and may lead to a price increase.

By Sohrab Darabshaw