Posco supplier to raise prices to lift margins

Graphite India said it plans to raise prices for a second time in about a year as the supplier of electrodes to ArcelorMittaland Posco struggles to lift profit margins from a six-year low.

The company, which gets 60 per cent of its revenue from overseas, will follow rival Germany’s SGL Group in raising prices by about 9 per cent after its raw material costs surged 20 per cent in the past year, Chairman K K Bangur said. Improving margins at India’s biggest maker of graphite electrodes may depend on prices as well as demand from Europe, where steelmakers are grappling with excess capacity and eroding profit. Graphite India, which is raising capacity by 26 per cent, is considering increasing tariffs after a similar jump earlier this year as raw material costs surged.

“This year what we face is a margin squeeze as opposed to being able to pass on all the cost increases,” said Bangur. “The state of our peers globally is much worse because their capacity utilisation is much lower.” Ebitda may narrow to 18.2 per cent in the year ending March 31.

“Pressure on profit margin and operational profit margin may continue until the global steel demand picks up,” said V.S.R. Sastry, a Mumbai-based analyst at Firstcall India Equity Advisors Pvt.

“Though the company is quite well-known internationally for its quality products, it cannot escape from the global economic vagaries.”

Graphite India gained as much as 2.4 percent to 82.05 rupees and traded at 82.85 rupees as of 12:48 p.m. in Mumbai trading. The stock has gained 19 percent this year, lagging behind a 23 percent increase in the key Sensitive Index.

Declining Margins
Graphite India has risen 21 percent this year, compared with a 23 percent increase in the benchmark Sensitive Index. They advanced 0.7 percent to 84.05 rupees in Mumbai yesterday.

The average capacity utilization at the electrode maker increased to 89 percent in the quarter ended June 30 from 79 percent in the year-earlier period, according to its statement on Aug. 3.

SGL, based in Wiesbaden, Germany, raised graphite electrode prices by 9 percent after energy and raw material costs increased, it said in a statement Sept. 24.

Graphite India is spending 2.55 billion rupees ($49 million) to increase its annual capacity to produce graphite electrodes by 20,000 metric tons to 98,000 metric tons, according to Bangur. A part of this additional capacity has already been commissioned and the company will start benefiting from higher production by the fourth quarter ending in March, he said.

Arc Furnace 
Graphite electrodes are used in electric arc furnace based steel mills. The company is counting on the growth in the use of electric arc furnace-based manufacturing of steel because of its low capital costs, lower break even tonnage, flexibility in locating plants closer to consumers and lower pollution levels compared with blast furnace steel plants.

The electric arc furnace technology may also be favored as more scrap is converted to steel. This is in turn will mean higher demand for graphite electrodes.

“As industrialization increases, as we keep investing in new projects and infrastructure, there will be more opportunity to convert the scrap back into steel,” Bangur said on Oct. 1. “The electric arc furnace route would be more preferred going forward.”

World steel production fell 1 percent in August to 124 million metric tons, the World Steel Association said Sept. 20. China’s output declined 1.7 percent from a year earlier, it said. The drop may herald a recovery for the metal as output comes more into line with demand, Barclays Plc said last month.

‘Down Cycle’ 
This is a good time to add capacity when the industry is on a “down cycle,” said Paras Bothra, vice president for equity research at Ashika Stock Broking Ltd. in Kolkata. “This is the right time to buy when the company is close to its book value and there is an entry barrier for the business.”

Graphite India is counting on the domestic steel industry and a recovery in the U.S. to boost sales of its products amid the uncertainty in Europe and weakening of Chinese demand.

ArcelorMittal, the world’s biggest steelmaker, on Oct. 1 said it will permanently close its Florange blast furnaces in France as the European debt crisis saps demand. Posco, Asia’s third-biggest steelmaker by output, in July reported second- quarter profit declined 44 percent as demand waned from carmakers and shipbuilders.

Last month Federal Reserve Chairman Ben S. Bernanke said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce employment.

“This quantitative easing will boost production and consumption of steel,” said Bangur. “We are not worried by one month numbers.”

 

Source: BusinessStandard.com