NEW YORK Essar Steel Algoma Inc.s steeper fall into the red in its fiscal second quarter was partly due to uncertain market conditions and its product mix, but the company said that strengthening momentum in the steel market coupled with a more competitive raw material contract will allow it to achieve better long-term sustainability.
The Sault Ste. Marie, Ontario-based flat-rolled producer sustained substantial losses in recent years and had negative working capital in its fiscal second quarter. While the losses were due to the companys "adverse contract" with its main supplier of iron ore pellets, a contract amended in June will move the companys raw materials cost more in line with the market price up to 2024.
"The extension provides for supply under more favorable terms and is a necessary step towards achieving the long-term profitability and sustainability of the business," it said.
Essar Steel, which logged its seventh consecutive quarterly loss for the three months ended Sept. 30 (amm.com, Nov. 14), also said that with spot hot-rolled coil selling at about Canadian $660 to C$670 ($629.47 to $639) per ton ex-mill in the current quarter, the company expects the recent strengthening in the market to continue into the next two quarters.
However, Essar Steel has seen an increase in spot hot-rolled coil prices, with tags ex-Sault Ste. Marie at C$600 ($572.24) per ton in its fiscal second quarter, up 10.1 percent from C$545 per ton in the previous quarter. However, selling prices across its products for the three months ended Sept. 30 fell 6.9 percent to C$638 ($608.38) per ton from C$685 per ton a year ago due particularly to softened plate prices vs. stable sheet prices, Essar said.
The producer faces several risks and challenges ahead, including an underfunded pension liability, changes in government regulations, currency fluctuations between the Canadian and U.S. dollar, along with working capital.
Essar said that it is "operating with a low level of liquidity" along with low levels of raw material inventories.
"Raw material inventories will have to be built up to acceptable levels in order to sustain operations until mid-April 2014," it said, adding that there have been "certain arrangements" in place to address potential shortfalls in working capital.
"The North American steel industry is cyclical in nature and sensitive to general economic conditions," it said. "In addition, steel prices are sensitive to trends in cyclical industries such as the North American automotive, construction, appliance, machinery and equipment, and transportation industries, which are significant markets for the companys products."