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Capacity additions help JSW, Tata Steel increase output

Adarsh Gopalakrishnan

BL Research Bureau

The reported crude steel production numbers of JSW Steel and Tata Steel for the first quarter of FY 2011 are up 14 per cent and 8.25 per cent, respectively, on a year-on-year basis.

JSW Steel's production growth was helped by the 3 million tonnes of steel production capacity commissioned at the beginning of the last fiscal. This addition, which added 80 per cent to the company's Vijayanagar capacity, had also aided significant volume-led growth during the depressed FY 2010.

Similarly, Tata Steel had commissioned 2.8 million tonnes of production capacity at the end of FY 2009. This addition, which increased the company's capacity by 36 per cent, saw standalone sales rise by 3 per cent in FY 2010.

While domestic steel realisations were impacted inline with global prices last calendar year, India was one of the few economies to buck the global trend of capacity shutdowns and lower production as it posted 2.8 per cent growth in calendar 2009. The growth trend has continued in the first four months of calendar 2010 also, with overall domestic production higher by 10 per cent over the same period in 2009.

The last quarter of FY10 saw domestic steel majors in a sweet spot, with low raw material prices and high steel prices translating into good profit growth. However, this trend may reverse in the first and second quarters of FY 11, given rising raw material costs and significantly lower realisations.

Accelerated imports from China in the current fiscal have kept realisations on a tight leash. This situation may continue, at least in the near-term, given China's surplus capacity and cooling economy.

On the raw materials front, reports indicate that international prices of quarterly contracts for iron ore and coking coal are likely to be higher (10 to 15 per cent) in the current quarter.

A likely hike in input cost may affect JSW Steel the most as it depends on non-captive sources for its coking coal requirement and 80 per cent of its iron ore requirement. Though SAIL and Tata Steel's Indian operations also depend heavily on external sources (80 per cent and 40 per cent respectively) for their coking coal needs, their iron ore requirements are met from captive mines.

Nevertheless, the steel majors may post good results in the first half of FY 2011 (on a y-o-y basis), given the low base in the corresponding period of FY 2010. However, the pressure may mount in the second half of the year if realisations continue to remain muted or drop.

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