Global demand remains weak due to an uncertain economy, putting pressure on the profit margins of steel makers
Posco, a South Korea-based company, Asia’s third-biggest steelmaker and the world’s fourth-biggest steel producer by 2011 output according to rankings by the World Steel Association, cut its 2012 sales forecast for the third time this year after quarterly profit missed analyst estimates due to a poor demand and decline in prices. Standard & Poor’s Ratings Services (S&P) also cut Posco’s rating. S&P expects Posco to encounter continued tough steel industry conditions in the region over the next 12 to 18 months as a result of slowing demand amid significant overcapacity.
Macroeconomic uncertainties make it unlikely that the global slowdown in demand for steel will turn around quickly. The recovery is expected to be delayed as the global economy remains gloomy due to fiscal crisis in advanced economies.
This is the case with other companies of the same sector in India, as well. The steel industry’s profitability, which had risen sharply from FY04, is on its way down, according to a recent report from Credit Suisse. In the past eight years, there has been a remarkable surge in mining as well as smelting operating profits, but pressures have emerged on both smelting and mining profits, and are likely to continue going forward. There has been a remarkable surge in iron ore and coking coal prices, which seems to be unwinding now. The slowdown in the Chinese economy and the debt crisis in Europe have restrained the demand growth and profit margins have declined.
As per the Credit Suisse report, over the past years the dramatic increase in profitability was due to cheap raw materials, either through direct ownership (e.g., SAIL and Tata Steel), or just geographical proximity aided by tariff barriers (most Indian steel makers). For Indian firms smelting margins were weak despite import duty protection, and Free Trade Agreement (FTA)-related imports have now brought domestic prices closer to international benchmarks, says the report. Indian steel equities are down, but are not cheap and with rising leverage below the operating line, run the risk of book value erosion.
“In the last four years, however, steelmaking margins, or smelting margins have come down sharply, hurt by the erosion of end-demand, and the lagged commissioning of capacity increases planned during the period of shortage. Over the past few months, as iron ore and coking coal prices have crashed, there are fears anew about the impact on the steel industry of the Chinese economy moving away from investment, and towards consumption.,” says the report.
The sheer scale and growth of Chinese steel demand was the root cause of the remarkable rise in iron ore and coking coal prices over the past five to six years. This is because supply takes a while to come up. The premium of steel prices in India over global prices has started to erode so much so that even without the import duty impact, Indian prices are barely higher than global prices. This has a structural implication on steel company profitability in India.
The report mentions that the Chinese steel production is unlikely to fall from current levels and growth is likely to be slow going forward, as it has been for the past few quarters. Further, the pressure on utilisation keeps rising because of steady commissioning of new capacity. In the past few years Chinese regulators have reacted to surging exports by raising barriers, the agenda being to keep steel prices low so steel-using industries (e.g., heavy machinery, ship-building) could become more competitive globally. This time, however, the need to maintain high utilisations may supersede such concerns.
Worryingly, domestic oversupply concerns are still real and can only further hurt local profitability. The reset on Chinese demand growth expectations have hurt raw material prices, and the continuing capacity growth is creating an overhang on already weak smelting margins. Despite some of the highest steel prices globally, smelting margins for Indian firms have been disappointing.
Steel creates its own demand, this combined with the fact that given its permanence, especially in its use in heavy infrastructure/real estate, there can be long periods of ‘digestion’ of steel use, causing a demand downturn. From a pricing perspective, there is a non-linear impact—when regions with a concentration of raw materials start to see a surge in economic activity, costs start to go up (currency, wages, other operating costs), pushing up the cost curve sharply. When this reverses, the cost curve deflates as rapidly.
Credit Suisse expects that in early years the decline in per-capita steel use globally going forward may not be steep, but even a flattening of demand could have a disastrous effect on both smelting and mining margins of steelmakers.
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Creating a healthy credit history is part of strong financial planning. So one’s endeavour should be to always build a strong credit history so that need-based loans can be easily obtained
Credit history is generally defined as the record of a borrower’s payment behavior that shows his or her ability to repay a loan. The significance of credit history lies in the fact that it acts an important parameter for sanctioning of loans by banks and financial institutions. A health credit history is in fact an intangible asset created by an individual which remains a life-long companion. In an era when credit bureaus are growing and influencing credit decisions of banks and financial institutions, it is important to maintain a healthy credit history. Even if we ignore the need for a good credit history exclusively for the purpose of borrowing, building a good credit history still remains important as credit behavior shows our approach towards managing our expenses and building strong financial base.
While building healthy credit history is important, equally important is to know how to build a healthy credit history. The following steps are extremely important in building healthy credit history which we must follow.
Cut your cloth according to your coat
This old saying can act as a panacea for overcoming any issue in credit history. The saying gives a very important message which is one should never borrow more than the ability to pay back the loan. People generally get tempted by offers which are given by banks and financial institutions in form of combo offers that are generally given at the time of borrowing of money. In some cases people even manage to borrow beyond 50% of earning capacity by taking personal loans and loans on credit cards.
Though there is no general rule for what can be the maximum borrowing that an individual should do, one should try to make attempts in order to ensure that after paying EMIs (equated monthly instalments) sufficient funds are left to meet monthly expenses and also generate some amount of savings every month. The moment you stretch your borrowing limits to a unmanageable limit any adverse scenario can create a black spot in the credit history which is popularly called as ‘delinquency’ and is known as delayed payment in layman’s language. Logically speaking your borrowing limit should not exceed more than 40% of your net income.
Read about “Credit Crossroads: The importance of maintaining a good credit score”, a seminar conducted by Moneylife Foundation
Have limited credit cards and ensure prudent usage of credit cards
Credit cards are a type of unsecured credit facility. These cards act as a very important reflection of our approach towards credit. It has been observed that credit cards often prompt individuals to spend more than what is desired. Having multiple credit cards is even more risky. You may end up spending on cards and rotate credit of one card to another. If credit cards are not used wisely, there is a risk of falling into debt trap. Also remember that once you have used your card, avoid any kind of delayed payment. Such behaviours are these days tracked by credit bureau and your ability to borrow may get reduced because of defaults in the credit card. Important things to remember with respect to credit cards are—optimize usage of cards, ensure that unused cards are cancelled and also ensure that any kinds of delay on credit card payments are avoided.
Credit history of your spouse can impact you too. Click here to learn more.
Check your credit history
It is suggested that every individual should check his/her credit history by obtaining credit reports from credit bureaus. The reports from credit bureau carry details of your credit history. Though the reports come at a cost, it makes sense to go for these reports. If anything adverse is found in the credit history, you should try to resolve the issue found in the credit history rather than ignoring such discrepancies. Also checking your own credit record helps you to avoid any last minute surprises which can come your way when you go and borrow money from a bank.
Never borrow for consumption, borrow only for asset creation
The golden rule for any borrowing is that borrowing should only be done for asset creation and not for personal consumption unless you have substantial disposable income. This is also a lesson to avoid impulsive buying. These days people often carried away by demonstration effect and end up spending more than what is desired. Many times such expenses are made on a credit card, which should be avoided at all stages. This will help create as healthy credit history as you will not have any undesirable credit transaction happening in your credit record.
Creating a healthy credit history is part of strong financial planning. So one’s endeavour should be to always build a strong credit history so that need-based loans can be easily obtained.
Read many other articles related to credit history and credit score, here.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)