Tata Steel Ltd’s results bear the scars of problems facing the global and domestic steel industry. Weak demand has led to declining steel prices globally, though declining raw material and fuel prices are bright spots. In India, bottlenecks in the mining sector, increased royalties on iron ore, and a long road ahead for a recovery in investment demand are hurdles.
Tata Steel’s global deliveries were relatively flat sequentially, which is not surprising given weak demand, and this being a seasonally weak quarter in India and Europe. But the company has upped its share of value added products to compensate. That may explain why its Indian operations’ per tonne realization increased by 2.5%. Europe still saw a 7.2% decline. But Tata Steel’s South-East Asian business incurred a loss due to falling prices and provisions. Profitability declined in all regions.
Tata Steel’s consolidated sales rose by 9.1% over the year-ago period to Rs.36,427 crore, and fell by 1.8% sequentially. Falling raw material prices and better product mix saw its material costs decline 3.1% sequentially. But the company did not benefit from this, due to a sharp jump in other expenses, which the company attributed to its India and European operations. In its Indian operations, factors such as higher royalty, provision for de-allocation of coal blocks and higher mark-to-market losses were cited as reasons.
The company’s operating profit margin declined by 1.5 percentage points sequentially, causing its profit before exceptional items to decline by 22.8%. In the foreseeable future, the European steel industry is going to remain under pressure due to rising Chinese imports. Lower iron ore prices are a relief, but not enough to compensate for falling prices. That is not a good prognosis for Tata Steel’s European operations.
In 2015, the sale of its long products business and what effect that has on its steel profitability could be something to look forward to. But that’s a long way away. As for its South-East Asian operations, China’s excess steel situation will keep up the pressure. India remains the favourite then to turn around its performance. It is reasonable to expect removal of bottlenecks to mining in the near to medium term. But economic recovery looks unsteady as yet, and steel-intensive sectors such as real estate and infrastructure could take time to get back on their feet. If steel prices continue to fall globally, then domestic prices too will continue to feel the pressure. Barring a swift recovery in India’s economic growth, and a quick resolution to the regulatory overhang on mining, it seems like a tough road ahead for Tata Steel
Source: Live Mint
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