Steel makers feel liquidity pinch, may defer new projects

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

28 Jun 2008

Steel firms, struggling with squeezing profit margins and higher input costs, face yet another challenge as the central bank tightens the noose on monetary policy, making borrowing dearer. Rising prices of key raw materials such as iron ore and coking coal, coupled with pressure from the government to keep local rates down has forced steelmakers to absorb the costs, even as global steel prices rose 50 percent in 2008. Inflation in India rose to 11.42 percent in mid-June, the highest in more than 13 years. The central bank on Tuesday raised its key lending rate and cash reserve requirements for banks should keep with it by 50 basis points, prompting banks to raise lending rates.
"Interest rates are going up so interest cost on working capital finance will also go up immediately," MVS Seshagiri Rao, finance director at JSW Steel Ltd said, adding that the firm may have to defer fresh projects for which it is seeking funding.
Steel makers such as JSW Steel, Jindal Steel and Power and Bhushan Steel Ltd are concerned the hikes will hurt working capital funding, impairing plans to buy coal and iron ore mines and raise capacities to cut costs.
Interest costs for working capital will rise by the same extent as the cash reserve ratio, said Ankit Miglani, director-commercial of Uttam Galva Steel.
Steelmakers have been battling costs since May after the federal government urged domestic steel makers to hold prices for at least three months to rein in inflation.
The companies, which reported profits in the Jan-March quarter, said earnings would fall and operating margins would shrink in the subsequent quarters due to cost pressures.

Source: Reuters