The Hindu Business Line : `Upswing in steel sector fortunes likely to continue'

GIVEN recent remarks by the Steel Ministry on regulating the metal's price, a bright sector outlook reminds of that preamble to many an economic theory - `all things remaining the same.'

Monday's market nervousness over price control notwithstanding, equity analysts and steel company officials said, 2004-05 could see a repeat of the previous fiscal's fortunes provided factors such as raw material cost and supply, value addition and operational efficiencies continue at the same level as before.

There may be that blip in Chinese demand for steel but healthy domestic demand should help companies maintain an upward curve in turnover as well as profits. The year 2003-04 concluded on a robust financial note for most Indian steel companies.

"Companies which are able to secure long-term raw material supply, sustain operational efficiencies, improve volume growth and focus on value addition will be able to continue on the upward path,'' said an analyst, who declined to be identified.

Tata Steel ended FY04 with a 72 per cent increase in net profit at Rs 1,746.22 crore against the previous corresponding Rs 1,012.31 crore. Net sales/income from operations touched Rs 10,702 crore (Rs 8,721.32 crore for the year ago period).

Essar Steel posted a FY04 net profit of Rs 59.99 crore (net loss of Rs 562.67 crore). Its turnover rose to Rs 3,717.65 crore (Rs 2,772.84 crore). Apart from higher net realisations, volume growth and richer product mix helped haul the company back into the black.

Steel Authority of India reported a FY04 net profit of Rs 2,512.08 crore (net loss of Rs 304.31 crore). Its turnover touched Rs 22,131 crore (Rs 17,591 crore). Jindal Iron and Steel Company and Jindal Vijaynagar Steel are yet to announce their full-year result for 2003-04. But industry representatives expect good numbers.

Both the Jindal companies have apparently produced more to meet the increase in demand, improved realisations contributing to their bottomline alongside. "Going forward, both these companies are poised to sustain growth as related factors such as raw material supply are being taken care off,'' the analyst said.

The China factor, seen as a sector dampener, is unlikely to impact Jindal Iron and Steel as its exports to that country are small. The company has a large exposure to countries in five continents.

At Tata Steel's annual press briefing, Mr B. Muthuraman, Managing Director, said that global growth rate for steel over the next 4-5 years should be similar to the 6.2 per cent growth of 2002 and the 6.8 per cent of 2003. Finished steel offtake worldwide is pegged at 917 million tonnes in 2004 and 958 mt in 2005. China's share is 263 mt and 290 mt respectively, the correction trend attributed to that country thus being a slightly lower growth rate of 10 per cent-12 per cent on a larger consumption base.

The slackening in China's steel demand would be marginal in impact, while other areas including India are beginning to kick in. At Tata Steel, product strategy appeared little different from the theme outlined through steel's recent bullish phase.

Mr R.C. Nandrajog, Vice-President (Finance) said, focus will be on increasing the basket of value-added items, an approach that respects both the better margins resident in such products and the insulation they offer from global steel's more cyclical product categories.

According to Motilal Oswal Securities, strong cost-cutting exercises in addition to external factors contributed in good measure to Steel Authority's performance. Going forward, healthy volume growth, coal supply, operational efficiencies and manpower realisation will be driving factors, it said in a report.

Further, both the steel industry and other consuming sectors have observed that a less hungry China helps cool off raw material and freight costs. To that extent, the prime mover of fortunes in the sector would be demand, not so much steel price.