Despite slower sales growth, steel
makers witnessed an improvement in operating profit margins in the March
2012 quarter, compared with the preceding one. But this could be short-lived.
For, any benefit companies dependent on imported coal would get from the fall
in coal prices would
be negated by the sharp decline in the rupee; which means the cost of
production will stay high.
During the March 2012 quarter, the rupee averaged 50 to the US
dollar and international coal prices averaged $235/MT. The rupee is currently
trading at 55 to the dollar whereas international coal has fallen to $220/MT.
So, the 6-7% dip in coal prices is nullified by a 10% rise in value of 1 US
Dollar.
During the March quarter, the steel industry registered a 10%
growth in sales – the lowest in six quarters. And with demand not expected to
raise significantly steel-makers will not be in a position to raise prices
much, which will squeeze margins. As inflation remains at uncomfortable levels,
there is a risk of regulatory intervention on steel prices, “Despite steel
being a deregulated commodity, the government may exert indirect control on it
as seen in the past,” says Ashish Upadhyay, associate director, Fitch
Ratings India.
Source: Economic Times
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