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Steel: Promising FY03 - Views on News from Equitymaster
 
 
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  • Apr 17, 2002

    Steel: Promising FY03

    Financial year 2002 was a tough year for the Indian steel industry with lower demand and import tariffs imposed by developed nations on the Indian steel exports. Domestic steel consumption however, witnessed a rise of 2.3% in FY02 to 27.1 m tonnes. This is much better than a marginal 1% growth recorded in FY01.

    Contrary to perception, export of finished steel at 2.7 m tonnes for the year was also higher by 3%. Export to European Union was negligible during the year, while exports to the US markets had totally stopped since the last eighteen months. Indian steel exports to EU countries are mostly based on negotiated prices for various products. With international prices remaining low throughout last fiscal, there were virtually no takers for Indian steel, which have a higher negotiated base price for exports to EU markets.

    Primary steel producers, Steel Authority of India (SAIL), Tisco and Rashtriya Ispat Nigam together produced around 17 m tonnes in FY02, a marginal growth of 1.7%. On the other hand new generation steel makers, Essar Steel, Ispat, Jindalís and Lloyds produced 4.2 m tonnes for the year, an increase of over 2.5%. Trimming production of steel helped steel majors to an extent, in reducing the demand-supply gap and getting better prices. For FY02, SAILís volumes sales rose by 7%, while Tiscoís volumes sales were higher by 4%.

    In value terms, sales were however, impacted by lower price realizations. Domestic steel majors lost around Rs 20-25 bn on account of steep decline in price of flat steel over the last one-year. However, with US imposing import tariff up to 30% to protect its domestic industry aided firming of steel prices. A virtual trade war between developed nations triggered a price increase of around US$ 10-30 per tonne.

    International steel prices encouraged Indian steel majors to go for price hike. After increasing the prices by around Rs 1,500 Ė 2,000 per tonne, early during April 2002, domestic steel companies are planning to maximize gains. Driven by improving demand conditions from both imports and exports market, steel companies are set to hike prices of galvanized steel by Rs 500-Rs 1,000 per tonne with effect from May 1, 2002. Galvanized sheets are used for construction (specially for roofing) and before the onset of monsoon there will be a strong demand for these sheets in both rural and urban areas. International prices of galvanized sheets have already spurred by US$ 70-100 in the last two months. Indian companies currently have around 5 m tonnes capacity for galvanized steel, with a small surplus. Jindal Iron and Steel, and Ispat are likely to benefit the most due to this price increase.

    Also, since hot rolled coils (HRC) are an input in galvanized steel manufacturing, there will be an indirect increase in demand for HR coils. HR coil prices have already risen by around Rs 500 per tonne since March. A further price increase could take some time after the markets absorb the existing supply.

    Backed by expected revival in steel demand and firm steel prices, Tisco has forecasted a 5% rise in finished steel output to about 3.8 m tonnes for FY03 (3.6 m tonnes in FY02). The company will increase production of valued-added HRCs, for the growing auto industry, consumer appliances and construction sectors. The company has entered into an agreement with Arcelor of Europe and Nippon Steel of Japan to cater to the need of the Indian automotive steel market. Steel companies are moving up the value chain from being merely low-grade steel producers. This is to improve profit margins and diversify the risk. Essar Steel has also decided to make value added steel to tap the pipeline, LPG cylinder and petroleum tanks market.

    Steel demand, which remained subdued in the previous year, is expected to turnaround on the back of improving global economic scenario. Domestic steel companies are expected to record better scorecard with their recent marketing initiatives and a recovery in steel prices. However, the effect of this would be reflected only during the second half of the year when steel consumption gets momentum.

     

     

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