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Poor Show

Low realisations & high input costs combined to mar the metal sector’s performance in 2011

This is another sector that disappointed the markets in the September quarter. The BSE Metals Index has lost 36 per cent over the last 12 months. Realisations of ferrous metals have continued to deteriorate, especially in Europe. The revenue of Tata Steel, which has heavy exposure to Europe, was affected. In addition, high raw material prices brought down the margins of steel manufacturers. Higher cost of power arising out of higher coal procurement prices and purchase of power from the open market due to coal shortages added to the strain on margins.

The story was the same for companies dealing in non-ferrous metals like aluminium. High costs and lower realisations dented performance. Hindalco has cautioned that the second half of FY12 would be equally difficult due to global uncertainties, falling prices on the London Metal Exchange, and increasing costs.

Coal India saw its average realisation per tonne increase by 25 per cent (y-o-y) owing to a price hike in February 2011 and sales at higher prices in e-auctions. But it has said it could miss its production targets this financial due to delays in environmental clearances at a few of its mines.

Industry leader Tata Steel performed badly, with its net plunging 89 per cent y-o-y in Q2FY12 due to the poor performance of its European operations (which accounts for 65 per cent of consolidated revenue). The European operations reported Ebitda of only $30 per tonne (Q2FY11) compared to more than $70 per tonne in the June quarter of this year.