The company said it had to pay a one-off cost of 7.4bn rupees because it was being ‘squeezed from both sides’, ie. demand in some of its largest markets has dropped, pushing down prices; while production costs have stayed roughly the same. That was particularly evident in downturn-addled Europe, which makes up about two-thirds of Tata’s production.
The good news is that Mumbai-based analyst Deven Choksey reckons things will start to look up this year. ‘The current quarter is showing some signs of improvement for the company’s Europe operations, with costs coming down and steel prices inching up. The pick-up in construction activity here should boost metal prices.’
That’s reflected by UK factory gate prices (the price retailers pay manufacturers before VAT, markups etc), which increased by a surprise 0.5% in January. The mechanics of factory gate inflation is fairly complex: while output price inflation (the amount paid to manufacturers) dropped from 4.8% in December to 4.1% in January, input cost inflation also fell, from 8.9% in December to 7% in January, thus increasing prices in real-terms for manufacturers. Great for the likes of Tata, not so great for consumers.
The rise was driven by increased alcohol, fuel and clothes prices, but it has raised concerns that inflation won’t fall quite as fast as the Bank of England had expected. The Bank had hoped that it would drop from 4.2% now to below 2% by the end of 2012, easing pressure on consumers, but a combination of high prices and its decision yesterday to inject another £50bn into the economy might scupper those plans. Looks like those hoping last month’s drop in inflation was the start of a trend will be sorely disappointed…