Steel: Striking performance but… - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Steel: Striking performance but…

Mar 8, 2003

For the equity markets, year 2002 was not anything to write home about. Of course, the fact that the Indian indices closed the year with gains is worth the appreciation, in light of the fact that a majority of the global indices closed the year in the red. It was a third straight year of losses for a chunk of the western markets. This is not surprising considering the ‘dotcom’ bubble bust, the 9/11 attacks, the attack on Afghanistan and the recent US-Iraq standoff, have all played the spoilsport for the equity markets. The economic sluggishness still continues to haunt some of the leading economies. In this backdrop of uncertainties and hardships, one sector has had a dream run on the global bourses and that is the steel sector. The sector saw one of its worst times in 2001 when the steel prices plunged, touching 20-year lows in January 2002. Since then, there has been a dramatic turnaround in the pricing environment. Just to put things in perspective, prices of HR Coils improved from lows of US$ 240 in January 2002 to the current levels of US$ 370-380. Similarly, the prices of CR Coils also improved from US$ 300 levels in January 2002 to the current US$ 460-480.

From the Indian perspective, apart from the improving scenario due to increasing prices, the initiatives taken by the companies at personal levels also contributed to the spectacular performance. The domestic steel companies took advantage of the prevailing low interest rates and restructured their debt, which reduced their interest outgo, thus improving their bottomlines. Also, cost reductions at operational level including employee rationalization by some steel companies helped the companies report better bottomlines.

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 steel industry has been going through a phase of high volumes on the back of healthy demand from the housing and infrastructure sectors on the domestic front. Demand from other user industries, like auto and consumer durables, have also aided the growth of the sector. On the exports front too, the sector has been able to register double-digit growth (up 22% YoY) with demand coming mainly from China.

The domestic industry saw healthy production growth of 7.9% during the 9 months ending December 2002. The government’s ambitious highway project to link the four corners of the country has fuelled demand for steel. The domestic consumption grew by 6.7% in the same period.

Production overview
('000 tonnes)April-Dec 2001April-Dec 2002Change (%)
HR Coils 2,534 2,899 14.4%
HR Sheets 252 249 -1.1%
CR Coils/Sheets 1,034 1,205 16.5%
GP/GC Sheets 377 482 27.9%
Pig Iron 2,944 3,892 32.2%
Finished Steel 22,432 23,912 6.6%

Just to put a perspective on global steel status, there was a growth of 6.4% in global steel production in 2002. Steel consumption went up by 4.2% during the same period. The primary cause for the spur was the demand from China, which grew by 14.8%. If China’s steel consumption is excluded from the total steel consumption, then the growth figure stands at a meager 1.2%. This reaffirms the fact that in recent times, China’s galloping economic growth has made the global steel scenario look better.

World Consumption
Particulars20012002EChange
China17019514.8%
Other Asia2012083.2%
EU-151391390.4%
CIS/Other6766-1.6%
NAFTA1301311.4%
Others6363-1.1%
Total7708024.2%
Total (excl. China)6006071.2%
Source: Tisco

Going forward, China is expected to continue on its growth path. China’s economy, which grew by almost 8% in 2002, is likely to maintain its consumption since the country has started huge construction projects in preparation for the Olympics 2008, which it will be hosting. Steel consumption in China is expected to increase by 10% in 2003 from 195 million tones (MT) to 215 MT. This is likely to drive the short-term growth in consumption of finished steel.

Apart from China, the global steel scenario also portrays a brighter picture. The global steel capacity utilization, which was at 76% in 1998, improved to 81% in 2001 and further to 84% in 2002. This is a result of global capacity being capped at about 1,050 MT, whereas there has been a slow but steady growth in steel production. The overcapacity, which was at about 250 MT in 1998, has gradually come down to about 170 MT. This could also be on the back of the decision by global steel companies to take a planned cut in capacities by 2005. However, global overcapacity still remains a cause for concern.

Another concern is that the production and consumption of steel is likely to come under pressure if economic sluggishness in major developed economies (including the US) continues. This could impact the bottomline growth of companies like SAIL, Tisco and Essar Steel, which export mainly to the American markets. Rising possibility of India coming under the net of anti-dumping duties by major steel importing countries also add to the uncertainties.

In the current budget no major announcements were made for the steel industry. The duty structure for steel products has not been altered. However, the peak customs duty has been brought down from 30% to 25%. This effectively reduces the 5% duty differential between the imports of cold rolled coils and hot rolled coils. Further, the increase in import duty of metallurgical coke by 5% will adversely affect certain steel manufacturers.

The Indian steel companies however, continue to have an edge over their global peers, as the operating costs are low in India. Easy availability of raw materials (iron ore) and cheap labour provide major cost advantages to domestic steel companies. But, much of this advantage is neutralized due to additional costs pertaining to capital equipment, higher power costs and low labour productivity.

However, the recent assistance provided by banks and financial institutions to the industry in the form of debt restructuring has come as a boon for the domestic steel companies. This restructuring exercise has brought down the average cost of debt of the steel companies from 16-17% to the current 11-12%.

In order to propel the steel industry further, it is necessary to encourage the consumption of steel in the country, as the per capita consumption of steel in India is very low (25 kgs India, 90 kgs China, 400 kgs Malaysia). It is hoped that the government’s thrust on infrastructure development, be it roads, rails, ports or power, will go a long way in improving the consumption levels in the country. The encouragement given to the housing industry in terms of tax sops will also aid future growth in consumption.

Although, the long-term growth prospects look encouraging for the Indian steel sector, short-term challenges continue to remain. The two biggest concerns for the steel industry (domestic and global) are the sustainability of the steel prices at current levels (due its cyclical nature) and the prolonged US-Iraq standoff. Undoubtedly, the domestic steel sector is having one of its most profitable years in recent times. However, growing concerns in the short term could have some impact on the sector.

Equitymaster requests your view! Post a comment on "Steel: Striking performance but…". Click here!

  

More Views on News

TINPLATE 2020-21 Annual Report Analysis (Annual Result Update)

Nov 16, 2021 | Updated on Nov 16, 2021

Here's an analysis of the annual report of TINPLATE for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of TINPLATE. Also includes updates on the valuation of TINPLATE.

SUNFLAG IRON & STEEL 2020-21 Annual Report Analysis (Annual Result Update)

Nov 15, 2021 | Updated on Nov 15, 2021

Here's an analysis of the annual report of SUNFLAG IRON & STEEL for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of SUNFLAG IRON & STEEL. Also includes updates on the valuation of SUNFLAG IRON & STEEL.

A Peek into Tata Steel's Stellar June Quarter Performance (Views On News)

Aug 13, 2021

Tata Steel's June quarter profits were higher than the full-year profits reported for fiscal 2021.

Shyam Metalics IPO: Key Points to Consider (Views On News)

Jun 12, 2021

Shyam Metalics is commanding a strong grey market premium ahead of its IPO next week.

Tata Metaliks Share Price Jumps 8% After Turning Profitable (Views On News)

Jul 14, 2021

A peek into Tata Metaliks' stellar June quarter performance.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

6 Penny Stocks that Rallied 1,000%+ in One Year (Views On News)

Dec 6, 2021

These penny stocks shed their penny status by surging 1,000% or more in the last one year.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE METAL


Dec 8, 2021 11:23 AM

S&P BSE METAL 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS