The future is bright but... - Views on News from Equitymaster

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

  • MyStocks


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

The future is bright but...

Mar 25, 2000

The old economy stocks seem to have fallen out of favour. Or so it seems. Consider this. In India, the estimated spending on infrastructure is likely to be Rs 7.6 trillion over the next twenty years. This money will be spent on building roads, bridges, ports, houses and what not. Despite this the money flow in stock markets is distinctly towards the new economy stocks, which are considered to be the new growth engines of the economy. (No doubting that.)

But step back a moment and think. The new economy companies will also require infrastructure to operate in. And building infrastructure will require steel, cement… Infact India's per capita consumption of steel is 20 kilograms as against 80 kilograms in neighboring China and 925 kilograms in South Korea. This highlights the potential for growth in domestic steel demand over the coming years as per capita income rises and the economy gains pace.

The domestic steel sector is likely to be a big beneficiary of this infrastructure-spending boom. And companies are eager to meet this demand. Indian steel companies benefit from domestic availability of raw materials (including iron ore) and cheap labour. However, despite these advantages India companies often lose out to foreign competition because of the latter's superior technology and larger volumes, which generate scale and size economies that are unparalleled by Indian companies. And this could prove to be a key area of concern in the future.

In the years post the Southeast Asian crises (and till recently) global demand suffered considerably. The situation became worse after the Russian crises that contributed to the dramatic increase in surplus steel capacity globally. With large surpluses floating in the market, steel makers resorted to large scale dumping in markets like India. The results were disastrous for the targeted countries. The Indian government had to ultimately resort to import curbs (anti dumping duties) after steel prices declined sharply and the domestic companies started to post decline in profitability if not losses (led of course by the Steel Authority of India). In a sequel to these measures, the government went on impose floor prices on the import of various steel products.

This recent crisis clearly highlighted the vulnerability of the domestic steel sector. Such events in the future could once again derail growth of the sector. Moreover, the government is bound by its commitments to the World Trade Organisation to bring down import barriers over the next few years. Then the use of tools (such as anti dumping duties) to protect the domestic steel companies would become subject to greater scrutiny.

Meanwhile, the short-term outlook has once again started to look up. The domestic demand scenario has improved over the last one year (see graph). In recent months international prices too have spurted on the back of a rise in global demand. This has resulted in an improvement in the domestic price scenario. More importantly, this has contributed to the recovery in the steel sector by providing the domestic companies opportunity to export steel (an export led recovery).

Although the near term picture looks rosy, hurdles in the form of anti dumping duties imposed by countries on imports from India could as yet nip the recovery in the bud. Already the United States, Canada and the European Union are considering or have imposed duties on imports of various steel products from India. A broadening of this measure to include other steel products could deal a deathblow to the domestic steel sector in the medium term.

The other concern (and the main one) pertains to the government's commitment to step up spending on infrastructure. The need for infrastructure is felt by all. However, given the weak fiscal position, the government is unable to launch a massive public works program. At best this exercise has been regional, which has created further imbalances in the standard of living.

Nevertheless the long-term scenario for the sector looks bright. The key to dominance in local markets would continue to depend on the willingness of the domestic companies to invest in new technology that will enhance productivity and reduce costs of production.

Equitymaster requests your view! Post a comment on "The future is bright but...". Click here!


More Views on News

SAIL Share Price Up by 5%; BSE METAL Index Up 2.8% (Market Updates)

Sep 25, 2020 | Updated on Sep 25, 2020

SAIL share price is trading up by 5% and its current market price is Rs 34. The BSE METAL is up by 2.8%. The top gainers in the BSE METAL Index are SAIL (up 5.2%) and JINDAL STEEL & POWER (up 7.2%).

TATA METALIK Share Price Up by 6%; BSE METAL Index Up 3.1% (Market Updates)

Sep 25, 2020 | Updated on Sep 25, 2020

TATA METALIK share price is trading up by 6% and its current market price is Rs 511. The BSE METAL is up by 3.1%. The top gainers in the BSE METAL Index are TATA METALIK (up 6.1%) and JINDAL STEEL & POWER (up 8.3%).

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 25, 2020 03:36 PM