JSW Steel Ltd’s December quarter results were not expected to be pretty. The main problems facing the steel sector are falling steel prices and rising exports from China, against a backdrop of slowing economic growth, especially in the emerging markets.
But there was another element to JSW’s results, which is a production cut due to the temporary shutdowns to upgrade its capacity. This meant that volumes were lower than usual but fixed costs were still being incurred, affecting margins adversely.
The company’s saleable steel volumes declined by one-fifth over the preceding quarter to 2.55 million tonnes (mt).
Its total revenue, too, declined by a similar amount to Rs.8,698 crore. However, its material costs went down 16% as the company said material costs did not decline as much as the steel prices did. But JSW did manage to lower employee costs and other expenses, while power and fuel expenses saw a significant cut both due to lower production and lower prices.
The net result was that its operating profit declined by 48.4% and its margin declined by 5.6 percentage points over the preceding quarter.
It incurred a pre-tax loss of Rs.6,69.6 crore, compared with a profit of Rs.249.8 crore. But it also incurred an impairment charge of Rs.2,122 crore due to the deteriorated steel market conditions. The final net loss amounted to Rs.923.3 crore, lower due to tax write-backs.
The last quarter of the current fiscal year could see the start of a turn for the better in the company’s performance.
Its revamped capacity is expected to start production in February.
This will take time to ramp up, so its full effect will be felt in FY17.
The government appears keen to support the steel industry, partly to ensure that the industry loans on the books of banks don’t turn irrecoverably bad. The industry has got some support in the form of tariff and non-tariff barriers but is expecting more.
The budget will be a keenly awaited event as industry will want measures that give it further protection from imports.
The real answers for the steel industry’s problems, however, lie overseas. News out of China suggests the government may limit steel output, to support prices. If that happens, it should be good news for steel producers. Evidence of that happening (or not) should be available by the start of FY17.
Domestic demand continues to be in relatively better shape, which means the home market for steel is alive. That is good news for producers such as JSW Steel as long as they can stem the tide of imports.
Investors seem to have decided it’s time to bet on steel stocks again. Since mid-Jan, JSW Steel’s share is up by 8.5% although it has lost a bit of ground in the past few days. The third quarter’s losses may give them some reason to pause. Sops for the steel sector in the budget and concrete steps by China to shutter unviable steel capacity are factors to watch for.
Source: Live mint