SAIL Q2 Profit Falls: Blames Rising Costs, Strong Dollar

Steel Authority of India (SAIL), the country's largest domestic steel producer, blamed a halving of quarterly profit on rising costs and a strong dollar on Thursday, and maintained demand would rise during the rest of the fiscal year.

The state-run steelmaker's profits sharply missed market estimates for the second successive quarter, but the firm is bullish on increased demand and stable steel prices looking forward, despite a gloomy global scenario.

There is definitely going to be a rise in demand in the second half (of this fiscal year), SAIL Chairman C.S. Verma told reporters after the results announcement. Steel prices have globally come down. They have been relatively stable in India...I don't foresee a further dip in steel prices.

Steel demand in India is rising at close to double digits, but outlook for steelmakers across Asia is mixed as firms feel the strain an uncertain global economy and slowing demand in China, the world's biggest consumer of the alloy. Japan's two biggest steelmakers Nippon Steel Corp and JFE Holdings Inc slashed their profit outlook last week and POSCO, the world's third-biggest steelmaker cut its 2011 investment plan.

Last month, forecaster World Steel Dynamics pared its production outlook for 2011 to 1.520 billion tonnes, from a previous forecast of 1.535 billion tonnes. SAIL said it spent 56.08 billion rupees ($1.14 billion) on raw materials during the quarter, a rise of 7.29 billion from a year ago, mostly on account of higher imported coal costs.

SAIL imports 75 percent of its coking coal requirement and a significant portion of that is from Australia. India holds 10 percent of the world's coal reserves but local supplies are falling short of demand as the country builds more power plants, and as domestic projects run into environmental and land acquisition delays.

Indian firms have spent $10 billion this year on overseas mines. The country's aluminium-to-cement Aditya Birla Group is considering bidding for Australia's New Hope Corp, a $5 billion coal mine, sources said this week.

MISSES ESTIMATES

SAIL said its net profit in July-September, its fiscal second quarter, fell to 4.95 billion rupees ($100.6 million) from 10.60 billion rupees a year ago. Net sales rose 3.6 percent to 109.80 billion rupees. A stronger dollar resulted in a notional loss of 5.09 billion rupees ($118.7 million) during the quarter, the company said in a statement.

SAIL, with annual capacity of about 15 million tonnes, is the largest steel producer in India, but lags Tata Steel's global capacity of about 28 million tonnes. The steelmaker plans to spend just under $3 billion in the current fiscal year ending March on capacity expansion projects as part of a programme to swell total capacity at its five integrated plants to 21.4 million tonnes by March 2013.

The impact of higher costs was partially offset by higher sales volumes, and an increase in net sales realisation to 36,230 rupees ($737) per tonne during the three months to Sept. 30 from 31,320 rupees a year previously, Verma said.

SAIL shares closed down 2.7 percent 109.75 rupees on Thursday, having recovered from a fall of 4.8 percent after the results, in Mumbai market that ended up 0.1 percent. The stock, valued by the market at $9.4 billion, has declined 39.9 percent so far in 2011, compared with a roughly 15 percent fall in the main stock index.