Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
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

JINDAL STAINLESS Surges by 6%; BSE METAL Index Up 0.1% (Market Updates)

Mar 18, 2019 | Updated on Mar 18, 2019

JINDAL STAINLESS share price has surged by 6% and its current market price is Rs 41. The BSE METAL is up by 0.1%. The top gainers in the BSE METAL Index is JINDAL STAINLESS (up 5.8%). The top losers are NALCO (down 0.1%) and HINDUSTAN ZINC (down 0.1%).

SAIL: Operating Margins Offer Hope; Bottomline Languishes in Red (Quarterly Results Update - Detailed)

Nov 21, 2017

The company registered good performance at the operating level and reported a positive EBITDA of Rs 9.1 billion during the quarter. However, bleeding continued at PAT level.

Tata Steel: India and SEA Shine; Europe Whines (Quarterly Results Update - Detailed)

Nov 3, 2017

India and South East Asia Business reported a good performance on the back of strong volume growth. European business witnessed pressure at EBITDA level due to narrower spread.

SAIL: Bleeding Continues at EBITDA Level... (Quarterly Results Update - Detailed)

Aug 28, 2017

The company registered a negative EBITDA of Rs 839 million during the quarter. This is on the back of an increase in raw material prices.

More Views on News

Most Popular

Are You Ready for the Big Nifty Move in the March Expiry?(Profit Hunter)

Mar 8, 2019

History suggests the Nifty could make a big move in March. Are you prepared to benefit from this opportunity?

Smallcaps Are Rallying and You Need to Make the Most of It Now(Profit Hunter)

Mar 7, 2019

Did you just miss the smallcap rally? Or is there still time to catch up? Read on for answers and more...

The One Sector to Bet on Today as India Grows into a 10 Trillion Dollar Economy(The 5 Minute Wrapup)

Mar 7, 2019

India's defence sector is suddenly under the spotlight. Can this sector ride along India's long-term growth story?

Is it the Right Time to Buy Mid and Small Caps Now?(The 5 Minute Wrapup)

Mar 6, 2019

Mid and Small Caps have underperformed large caps in the past year. Is the tide about to turn?

The Jet Airways Crisis in 6 Charts(Sector Info)

Mar 5, 2019

What happened to Jet Airways, once among top 3 airlines in India? Is it another Kingfisher in the making? Read on...


Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms


Mar 18, 2019 (Close)