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Steel: Price rise

Mar 7, 2003

Performance of the domestic steel companies has been spectacular in the last one year both in terms of financial performance and stock price movement. These companies have out performed the bourses by huge margins. Tisco, SAIL, Essar Steel, Jindal Iron & Steel and Ispat Industries are some of the stocks that have managed to outperform the Sensex in the current fiscal. In this article we look at one of the key reasons for the spectacular performance of these steel companies, the rise in steel prices.

Performance snapshot
 SalesOperating profits
(Rs m)9mFY029mFY03Change9mFY029mFY03Change
SAIL 97,503 118,174 21.2% 3,166 12,421 292.3%
TISCO 47,847 57,355 19.9% 9,102 14,800 62.6%
Essar 15,195 20,881 37.4% 653 2,170 232.4%
Ispat 13,483 20,359 51.0% 73 2,808 3762.9%
JISCO 7,636 10,198 33.6% 542 2,020 273.0%

The table above shows the huge improvement in the operating profits of the steel companies. Though other factors also have contributed to the rise in operating profits, much of the improvement has been as a consequence of the rise in steel prices. To put things in perspective, Tisco has shown a volume growth of 5% in the concerned period while its operating profits went up by over 60%. Similarly, it must be noted here that while sales of the set of five companies studied above have grown by 25%, the combined operating profits of these steel companies has shot up by 150% in 9mFY03 compared to 9mFY02. The operating margins have doubled to about 15% from 7.4% YoY.

The average steel prices of hot rolled coils, after touching lows of about Rs 12,000/tonne (inclusive of freight and excise) in January 2002, have since then been on an uptrend. From the levels of January 2002, the prices have improved by anything between 50-55%. Similarly, the prices of cold rolled sheets have also increased by about 45-50% from Rs 16,000/tonne levels to the current Rs 23,500/tonne.

The price increase was triggered in the international markets. The primary cause has been the demand from China, which imports roughly 30 m tones of steel (To put things into perspective India’s total capacity is 34 m tones). This has kept the demand ticking in the international markets. Demand from China has been on the rise primarily due to its economic growth. The country has posted a GDP growth of about 8%. Further, the country is hosting Olympics for 2008, which has created demand for white goods and consumer durables in the country. Apart from China, the decline in over capacity at a global level and protectionist measures taken by the America (that is not applicable to Indian companies due to the status of a developing nation) has also aided the Indian steel companies.

However, India exports only 11% of its steel production. Thus, the major rise has, therefore, been due to rise in domestic prices as domestic prices are closely linked to the international steel prices. But despite the hike in prices, the domestic demand continued to be strong due to a strong growth in agriculture in FY02. The index of industrial production (IIP) in 9mFY03 jumped by 5.3% as compared to a growth of 2.5% in 9mFY02.

However, going forward, it must be kept in mind that steel is a cyclical commodity. With agricultural output expected to decline by 3.3% for FY03, the industry will more likely than not grow at a much subdued pace in FY04 as compared to FY03. Therefore, it is likely that the strength of the current ruling prices will be tested. Also, geo-political concerns like the US-Iraq standoff and the sluggish growth of US and European economies could have an adverse impact on the demand for steel and consequently the prices may be affected. It is, therefore, necessary to be on alert of any correction that could take place on the pricing front.

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