Tata Steel margins under pressure, in talks with Rio

Tue Feb 15, 2011 3:44pm GMT

* Q3 profit 10.03 bln rupees vs estimate of 11.1 bln rupees

* Sees 2011 Europe steel demand up 3-5 pct, India's 10-12 pct

* Interested in coal supplies from Riversdale,talking to Rio

By Prashant Mehra

MUMBAI, Feb 15 (Reuters) - Tata Steel (TISC.BO: Quote) said its margins would remain under pressure due to rising raw material prices, adding that it was in talks with Rio Tinto (RIO.AX: Quote) to ensure coal supplies from Africa-focused miner Riversdale (RIV.AX: Quote).
The world's No. 7 steelmaker on Tuesday said quarterly net profit more than doubled, driven by demand and pricing in Europe and robust growth at its Indian operations, but the company lagged estimates as higher raw material costs squeezed margins.
The $500 billion global steel sector has been caught in a margin squeeze since the middle of 2010, when raw material costs began increasing and steel prices dropped as activity slowed. While demand is improving from the auto sector, the other key market, construction, is struggling to pull clear of the crisis.

Tata Steel said it expected steel demand in Europe to rise 3 to 5 percent this year and demand in India to grow 10 to 12 percent, but managing raw material costs would be a key challenge.
"Margins are under pressure because we are consuming raw materials at inflated prices," Karl Kohler, head of Tata Steel's European operations, told reporters after the results announcement.
"Selling prices are recovering but the position needs to be maintained as impact of raw material costs is increasing."

Managing Director Hemant Nerurkar said Tata Steel was interested in securing coal supplies from Riversdale, in which it owns a 24 percent stake. Riversdale has received a $3.9 billion bid from Rio Tinto, which was backed by Tata Steel's representative on Riversdale's board.
"We are basically interested in securing coal supplies. We are discussing various options with Rio," Nerurkar said.

Tata Steel acquired Corus, Europe's second-largest steelmaker, for $13 billion in 2007, marking the largest overseas acquisition made by an Indian company so far.
European operations account for two-thirds of Tata Steel's global capacity of about 30 million tonnes, while the Indian operations contribute a quarter. It also has units in Thailand and Singapore.
Most global steelmakers have suffered sharp falls in December quarter profit. Last week, the world's largest steelmaker ArcelorMittal (ISPA.AS: Quote) reported profit lower than the previous quarter, but forecast a rebound in demand and prices at the start of 2011. POSCO (005490.KS: Quote), Nippon Steel (5401.T: Quote) and JFE (5411.T: Quote), some of the largest steelmakers, all suffered sharp falls in October-December earnings due to pricey raw materials and tepid demand.

Q3 PROFIT MORE THAN DOUBLES
Tata Steel reported a net profit after minority interest and share of profit of associates of 10.03 billion rupees ($220 million) for its fiscal third quarter ended December, compared with a consolidated net profit of 4.73 billion rupees a year ago.
Net sales were 286.06 billion rupees compared with 260.69 billion a year earlier.
A Reuters poll of brokerages had forecast a net profit of 11.1 billion rupees for the quarter, on net sales of 263.2 billion.
Last month, Tata Steel raised $770 million in a share sale in India to fund a 3-million-tonne capacity expansion at a plant in eastern India and repay a part of its $10 billion debt. [ID:nSGE70K06A]
Tata Steel said it had started preparatory work for a 6 million-tonne a year steel plant in the eastern state of Orissa.
Shares in Tata Steel, valued by the market at about $12.3 billion, are down about 9 percent so far in 2011, compared with about 11 percent fall in India's benchmark stock index .BSESN.
Ahead of the results, Tata Steel shares closed 0.4 percent lower at 616.55 rupees in a Mumbai market that rose 0.4 percent. ($1=45.5 rupees) (sourced:ThomsonReuters)

Tags:Tata steel, margins under pressure, Rio Tinto, Riversdale Mining Ltd., Europe, Q3, raw material, steelmakers, Corus, Thailand, Singapore, ArcelorMittal, POSCO, Nippon Steel Corp, JFE

Asian Thermal Coal Contracts May Rise 36% to Record After Rains

By Ben Sharples - Feb 14, 2011
Asian utilities begin negotiations with coal producers this week and may be forced to pay as much as 36 percent more for their fuel after heavy rain in Australia, Indonesia, South Africa and Colombia disrupted output.

Prices for the year starting April 1 may increase to between $125 and $133 a metric ton, analysts from Bank of America Merrill Lynch, UOB-Kay Hian Ltd., Citigroup Inc. and National Australia Bank Ltd. said. Japanese utilities agreed to pay Xstrata Plc $98 a ton for the 12 months starting April 1, 2010, the company said in August.
“There are still lingering supply concerns around the place, not just in Australia,” Mark Pervan, head of commodity research at Australia & New Zealand Banking Group Ltd. in Melbourne, said by telephone. The bank has forecast contract prices may rise to $125 a ton.

Heavy rain has crimped output in Colombia, Indonesia and Australia, where flooding in December and January shut mines and damaged rail lines in Queensland, the nation’s biggest coal-producing state. Prices more than doubled to a record $125 a ton in 2008 after floods disrupted supply from the state. Contract negotiations start this week, according to Citigroup.
While prices of the fuel for immediate delivery “have eased back” after increasing to a two-year high last month, “the focus will be on the longer-term outlook,” Citigroup analysts said in a Feb. 11 note. “We still see strong demand growth and expect contract prices to be settled at record highs.” The bank forecast contract prices at $130 a ton.

Newcastle Price The price for thermal coal at the port of Newcastle in New South Wales, the benchmark for Asia, rose to $138.50 a metric ton in the week ended Jan. 14, the highest since September 2008, according to IHS McCloskey, a Petersfield, U.K.-based provider of data. It was at $120.75 in the week ended Feb. 11.
Queensland exports about 50 million tons of thermal coal each year, according to Macquarie Group Ltd. Shipments of the power station variety may be reduced by more than 5 million tons after a landslide shut a rail network that serves mines operated by Peabody Energy Corp. and New Hope Corp., Citigroup analysts, led by Daniel Hynes, said in the Feb. 11 report.
Merrill Lynch analysts led by Sydney-based Alex Tonks said contract prices may rise to $125 a ton, and National Australia Bank Ltd. minerals and energy economist, Ben Westmore, said they may increase to $130 a ton. UOB-Kay Hian Hong Kong-based analyst Helen Lau said they may reach $133 a ton.
Annual accords between mining companies and customers may be agreed “by mid-to-late March,” Australia & New Zealand Banking Group’s Pervan said. “Xstrata has become the number one player in the market. It’s their deal with a Japanese utility, usually Tokyo Electric,” that sets the benchmark for prices.
(sourced:bloomberg)
Tags: Asian Thermal coal contracts, heavy rains, Bank of America Merrill Lynch, UOB-Kay Hian Ltd., Citigroup Inc., National Australia Bank Ltd, Xstrata Plc, Newcastle coal, Tokyo

Chinese steelmakers lift March prices on high cost

Tue Feb 15, 2011 6:42am GMT

* Main product prices up around 300 yuan/tonne

* Price increases in line with expectations

* Analysts show concerns of correction

(Combines price changes by Baosteel and Nippon, adds details, analysts' comments)

By Ruby Lian and Jason Subler

SHANGHAI, Feb 15 (Reuters) - Two top Chinese steelmakers will raise their main product prices for the third month in a row in March, a widely-expected move to cope with surging raw material costs and to reflect a positive outlook for demand.

Asian steelmakers have struggled with surging costs of coking coal and iron ore amid a supply squeeze over the past few months.

The devastating floods in Queensland in Australia have sent coking coal prices up by around one third while export restrictions from India have contributed to a jump of more than 10 percent in iron ore prices since the beginning of the year.

The country's top listed steelmaker, Baoshan Iron & Steel (Baosteel) , said on Tuesday it would follow Monday's move by its rival Wuhan Steel , China's No.3 producer, and lift March prices for key products.

Baosteel will raise prices for hot-rolled coil by 300 yuan ($45.48) per tonne, while prices for cold-rolled coil will go up by 260-300 yuan per tonne. Wuhan raised both by 300 yuan.

"The increases are within expectation as recovering orders from downstream sectors and higher raw materials costs have forced domestic steelmakers to raise prices," said Hu Yanping, an analyst with industry consultancy Custeel.com.

Despite the high cost of iron ore, China imported a record 69.0 million tonnes of the material in January, Chinese customs data showed on Monday. The monthly value of shipments rose for the third month in a row, skyrocketing to a record of $10.4 billion.

"We expect the problem with refractory material (cost-push and technical issues) to last for a while and prices for HRC/CRC could increase in short run," Citi Investment Research & Analysis said in a research note.

Baosteel's shares were 0.4 percent higher by 0548 GMT while the broader benchmark index gained 1.0 percent.

HEADWIND IN MARCH?

Spot iron ore prices rose to fresh record highs and were likely to extend their winning streak on Tuesday, prompting Asian steelmakers to increase product prices.

Outside of China, Japan's top steelmaker Nippon Steel Corp also raised February contract price for H-beam steel by 3-4 percent, joining the battle to pass on surging upstream raw materials costs to end users.

The most active October rebar futures on the Shanghai Futures Exchange touched a high of 5,196 yuan per tonne on Tuesday, near the record 5,230 yuan hit last Friday.

Despite sharp gains, some analysts believe the post-holiday rally in steel prices is likely to come to an end in March as traders and end users may not be able to accept aggressive price hikes as the intensifying monetary tightening measures continues to weigh on prices and demand.

Chinese inflation was lower than expected at 4.9 percent in the year to January, but price pressures continued to build and will force the central bank to stick to its course of monetary tightening.

"The most serious threat to the current steel price is the accelerating production pace of private steel mills," Henry Liu, head of Commodities/Metals & Mining of Hong Kong-based Mirae Asset, said in a research report.

"Steel mills are recklessly boosting their ex-factory prices, which further squeezes the margins of traders. The party will come to an end when traders find it difficult to finance their inventories," Liu added.

Citi also noted that marginal producers' cash profit for rebar continues shrinking as leading steel mills mainly produce high-end flat products. ($1=6.596 Yuan)
(Reporting by Ruby Lian,Jason Subler, Editing by Kazunori Takada, Himani Sarkar,sourced:reuters)

Tags:Chinese steelmakers, March 2011 contract prices, raw material, strong demand, coking coal, Baoshan Iron and Steel Co., Citi Investment, Nippon Steel Corp, Shanghai Futures Exchange, import export, steel mills