Tata Steel Options Costs Surge as Loss Consensus Eludes Analysts

  • High Chinese steel exports into Europe pressure margins
  • Currency volatility, price decline to weigh on results

The cost of Tata Steel Ltd. stock options jumped to a five-month high, signaling investors were hedging their bets amid the uncertainty surrounding the size of the fiscal third-quarter loss that India’s biggest producer of the alloy will probably report on Thursday.

Group net loss estimates for the three months ended Dec. 31 from 20 analysts compiled by Bloomberg range from a loss of 6.8 billion rupees ($100 million) to 17.1 billion rupees. Sales may drop 15 percent to 283.4 billion rupees, according to the average forecast in the survey.

“The wide range of estimates indicate the degree of uncertainty of when the steel sector may revive,” Chakri Lokapriya, the Mumbai-based chief investment officer at TCG Advisory Services Pvt., which manages about $3 billion in assets worldwide, said by phone. “We will wait by the sidelines.”

A slowdown in China, the biggest producer and consumer, is hurting the global steel industry as it exports its surplus at lower prices, pressuring margins of the world’s biggest mills. Apart from dumping by China, Tata Steel has to contend with higher salaries and pensions at its U.K. operations, the costs of which are hard to gauge, according to Rahul Dholam, an analyst at Angel Broking Ltd. in Mumbai.

The price of Tata Steel’s February puts with a strike price of 220, the most popular by number of outstanding contracts, rose 10 percent. The 200 put, the second-most popular put by open interest, jumped 26 percent. At-the-money one-month option costs climbed to 54.8 points at 2:20 p.m. in Mumbai, the highest since Sept. 7.

‘No Clue’

The total number of put options traded increased to 4,278 contracts, compared with a 20-day average of 3,586, while open interest in fell to 4,875 from a 20-day average of 6,181, according to data compiled by Bloomberg.

“Investors don’t have a clue about the extent of European inventory loss due to slowdown and reduction in prices,” Abhimanyu Sofat, the Mumbai-based co-founder of AdviseSure Ventures Pvt., an investment advisory firm, said by phone. “The uncertainty due to huge variation in analyst estimates is forcing traders to hedge their positions.”

Tata Steel’s shares, which tumbled 35 percent last year, slid 1.3 percent to 221 rupees at 2:44 p.m. in Mumbai. The benchmark S&P BSE Sensex gained 0.4 percent.

‘Bleeding to Death’

Tata Steel wants to sell its U.K. operations amid a collapse in prices of the alloy and the company is in talks with Greybull Capital LLP for the sale. Klesch Group withdrew from talks to buy the unit in August saying the industry was “bleeding to death.”

"The China impact, the currency volatility and the drop in steel prices in Europe have been more prominent," Goutam Chakraborty, a Mumbai-based analyst at Emkay Global Financial Services, said by phone.

Tata Steel, which bought Corus Group Plc for about 6.2 billion pounds ($8.9 billion) in 2007, has been cutting operations in the U.K. since the 2008 global financial crisis. Last month, the company announced job cuts of 1,050 in U.K. Steel employment in Europe is down 20 percent since the global financial crisis and demand for steel in the region is still about a quarter below the pre-crisis levels.

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