Ref: MPML/PMS/124/2008
Date : July 4 , 2008
Steel Price Cut To Hit Pipe & Tube Makers Hard
"THE government's decision to force a 10% price cut for steel pipes is its latest step in the war on inflation."
"Interestingly, the price cut comes as a relief for petroleum companies, since they consume over 70% of these products."
"The pipe industry constitutes around 5-10% of the overall steel industry and within that, the seamless and ERW pipes constitutes just 20% of the overall industry. "
THE government's decision to force a 10% price cut for steel pipes is its latest step in the war on inflation. Though details are not yet available, prima facie, it is likely to have a major impact on the makers of these products. However, if the cut is not applicable to exports - which is possible -the impact would be relatively less as half of these pipes and products are exported.
The steel pipes and tubes industry is close to around Rs 20,000 crore and is dominated by five players. The raw materials for manufacturing tubes and pipes are hot-rolled plates and billets, the prices of which have almost doubled in one year. This has led to over 200-300 basis points of contraction in operating margins. The average operating margin in this segment is now 15-20%.
The price cut is expected to erode more than one-third of the operating profit of these companies, even if exports are exempted. Similarly, the operating margin may come down by over 400 basis points. Some of the affected companies include Jindal Saw, Welspun Gujarat and Maharashtra Seamless.
Interestingly, the price cut comes as a relief for petroleum companies, since they consume over 70% of these products.
According to industry experts, the price cut may be applicable only to seamless and Electric Resistance Welded (ERW) pipes. In such a case, the overall impact may be muted.
This is because the pipe industry constitutes around 5-10% of the overall steel industry and within that, the seamless and ERW pipes constitutes just 20% of the overall industry. Thus, the total market which will be directly affected will be less than Rs 4,000 crore. In this scenario, Maharashtra Seamless, which derives most of its revenue from these categories, would be badly affected. Companies such as Jindal Saw and Welspun Gujarat would see over 15-20% of their revenues impacted by such a decision.
(Source: - Economic Times)