VITAL INDUSTRY UPDATES – 22/05/2015

May 22, 2015 1:33 pm Published by

Tata Steel slips on poor performance

​Tata Steel’s weak performance in 2014-15, rubbed off on its stock price, which fell 5 per cent on Thursday. An impairment charge of around ₹6,000 crore primarily relating to the write-down of goodwill and other assets in its European operations resulted in the company posting a consolidated net loss of ₹3,926 crore in 2014-15. It reported a net profit of ₹3,595 last year.

But even excluding the one-time impairment charge, Tata Steel’s financial performance has been muted in 2014-15. It is the first time in many years, that the steel major has reported a fall in operational income – down 6 per cent in 2014-15 compared to the year-ago period.

Weak steel prices and a ban on its mining operations led to a steady deterioration in Tata Steel’s profitability through the FY15 fiscal.

Sluggish domestic business

The slowdown in the company’s high-margin India business impacted its overall performance. Indian operations account for 30 per cent of its consolidated revenues.

Subdued domestic steel demand coupled with the surge in steel imports impacted the company’s sales realisations during 2014-15. As a result, even as volumes grew 2.7 per cent year-on-year, sales turnover remained flat.

A sharp rise in imports – 80 per cent growth in flat steel products and over 200 per cent in long steel products – has hurt the pricing power of domestic steel manufacturers.

Mining ban

The company has in the past enjoyed an advantage over other domestic players, on account of its captive iron ore resources. But the ban on its mining operations has forced the company to source expensive iron ore from outside for its India operations.

The EBITDA per tonne (operating profit per tonne of steel), has thus declined 26 per cent (year-on-year) to ₹11,546 in 2014-15. The slide in EBITDA per tonne was even sharper in the latest March quarter, shrinking almost 60 per cent.

With the company’s mines turning operational since December 2014, the situation is likely to improve. But the full benefit of this will only accrue to the company, once it completely liquidates the existing stock of high-cost iron ore. Even so, a pick-up in economic growth, which will boost domestic steel demand, is critical for a turnaround in performance.

European operations

Tata Steel reported a fall in overall sales volumes (down 1.4 per cent) and turnover (down 5.7 per cent) from its European operations during 2014-15. Higher sales of high-margin valued-added steel products (over a third of sales), however aided the operational performance. The EBITDA per tonne for the European operations improved to ₹3,135 (up 45 per cent year-on-year) during 2014-15.

Given the continued weakness in the global steel industry and subdued commodity prices, Tata Steel booked an impairment charge – write-down of its long products business in Europe and some of its overseas investments.

Copper rises from 3-week low on China’s PMI data

London copper futures edged higher on Thursday, bouncing off the previous session’s three-week low after another soft Chinese manufacturing report suggested Beijing may have to do more to stimulate the world’s No. 2 economy.

Chinese factory activity contracted for the third month in May and output shrank at the fastest rate in just over a year, a private survey showed.

But the flash HSBC/Markit Purchasing Managers’ Index (PMI) improved slightly to 49.1 from 48.9 in April.

“The fact that the PMI is higher than the previous number suggests that going forward we can expect some improvement in the Chinese economy and that’s supportive of metals prices,’’ said Phillip Futures analyst Daniel Ang, who is targeting copper to hit $6,500 in the near term.

China’s central bank is widely expected to cut interest rates further in coming months, on top of three reductions since November, and may also lower banks’ reserve requirements again to reduce companies’ borrowing costs and encourage more lending.

LME copper

Three-month copper on the London Metal Exchange was up 0.6 per cent at $6,256.50 a tonne by 0704 GMT, after touching $6,194 on Wednesday, its weakest since April 30.

The most traded July copper contract on the Shanghai Futures Exchange rose 0.4 per cent to close at 45,120 yuan ($7,276) per tonne.

Also supporting sentiment, according to minutes of the US central bank’s April policy meeting, Federal Reserve officials believed it would be premature to raise interest rates in June even though most felt the US economy was set to rebound from a dismal start to the year.

The dollar came off Wednesday’s highs versus a basket of currencies, making dollar-priced commodities more attractive for buyers using other currencies.

LME nickel

LME nickel rose 0.5 per cent to $13,170 a tonne, continuing a modest recovery from Tuesday’s 4.8 per cent plunge fuelled by a surge in inventories to a record high.

Stocks of nickel in LME warehouses rose to 446,640 tonnes, indicating sluggish global demand.

10,500-cr harvest for urea sector

To boost urea production and reduce import dependence, the Cabinet has decided to pump in ₹10,500 crore in two plants.

The Cabinet Committee on Economic Affairs, headed by Prime Minister Narendra Modi, on Thursday approved an investment of ₹6,000 crore towards the revival of the closed Sindri unit of the Fertiliser Corporation of India Ltd (FCIL). The unit and its other facilities have not been operating since 2002 and the move makes it the fifth facility of a public sector manufacturer to receive an approval for revival.

It also approved the setting up of a new ammonia-urea complex of 8.64 lakh tonnes (lt) capacity at Namrup in Assam through public-private partnership (PPP) or by a joint venture involving the Brahmaputra Valley Fertilizer Corporation Ltd (BVFCL), Oil India Ltd and the Assam government. The estimated investment is ₹4,500 crore.

Both the moves are aimed at reducing urea imports, which are estimated at 80 lt, with domestic production pegged at 230 lt and demand at around 310 lt.

FCIL unit

“The setting up of a new unit at Sindri will meet the growing demand of urea in the States of Bihar, West Bengal and Jharkhand. It will also ease the pressure on railway and road infrastructure … thereby saving government subsidy on freight,” an official statement said. The government expects the unit to create 500 direct and 3,000 indirect jobs.

The statement also mentioned that there were no functional urea units in Eastern India barring two small facilities in Namrup. Earlier, the Centre had approved revival of the Talcher and Ramagundam units of FCIL through a ‘nomination route’, its Gorakhpur unit through a ‘bidding route’, and the Barauni unit of Hindustan Fertiliser Corporation (HFCL). These four units are likely to produce 52 lt of urea annually.

“Now the Sindri unit is approved for revival through bidding route. Earlier its revival was to be done through PSUs (SAIL & NFL),” the statement added.

BVFCL revamp

The ammonia-urea complex venture with BVFCL, OIL and Assam government having an 11 per cent, 11 per cent and 26 per cent equity holding, respectively, and the balance 52 per cent by private or public sector entities, would be inducted through competitive bidding.

It would help spur urea exports and save ₹600 crore annually due to reduction in production costs and import substitution.

“The entire production of urea from this unit shall be neem-coated so that its benefits are available to the farmers of the North-Eastern region also,” it added.

The Cabinet also approved financial restructuring of BVFCL by waiving entire cumulative interest accrued of Central loans that stood at ₹774.61 crore as of March 31. It further approved conversion of ₹594.71 crore in government loans to interest-free loan.

“This will enable BVFCL to participate as equity partner in this project and will sustain the operation of the existing plants during the interim period till the new plant comes into operation,” it added.

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This post was written by Atlantic Admin