Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 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.
Steel: Sign of times to come - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Apr 19, 2003

    Steel: Sign of times to come

    The performance of steel companies on the bourses over the last year or so has been nothing but impressive. However, will the companies continue to perform on similar lines going forward? In this article, we look at the possible scenario of the domestic steel sector in light of the changes taking place in the industry.

    To begin with, let us first consider the most important of all factors that put the steel companies and the industry as a whole in the limelight. Steel prices have sky rocketed in the last one year in the domestic markets and this is due to the sharp rise in international steel prices. This phenomenon in the international markets was due to the fact that steel consumption rose significantly on the back of huge demand by China, whose GDP continues to grow at 7%-8%.

    China was the major cause for the huge upsurge in steel consumption in the last one year. To put things into perspective, China’s steel production is estimated at about 180 million tonnes (MT) while its consumption was at about 200 MT in FY02 (18% of global consumption). This shortfall in production in China’s domestic markets led to increased demand for imports, which in turn impacted steel prices positively (as shown in the graph above). Moreover, since the US had imposed tariffs on steel imports from EU and other countries (in order to protect its domestic steel industry), there was an upward movement in prices in the US markets as well.

    However, concerns that were always present have now started to surface. The sustainability of steel prices at such high levels has come under cloud. Global prices of flat steel products are displaying signs of retracing some of their gains thus marking an end to a year long rally. Price of hot rolled coil (HRC), which ruled at US$ 370 levels have come down to US$ 270-US$ 280 currently. This is a huge 25% retracement in prices within a month or so. Though the price fall has been restricted to about Rs 1,500 in the domestic markets, caution needs to be exercised going forward.

    One of the key reasons could be due to the fact that consumption has showed signs of slowing down already. It is important to note here the rate at which the Chinese consumption of steel has grown in the last 3 years. China’s production in 2000, 2001 and 2002 grew at 3%, 5% and 20% respectively. The consumption growth rate was also higher at 4%, 21% and 15% respectively for the years under consideration.

    As is clearly visible from the chart above that the growth rate of steel consumption has slowed down. Reportedly, this has led to some sort of inventory pile up in the Chinese markets, thus affecting prices. China has already indicated of some cancellations of its import orders and is also entering into future contracts at lower prices. Amidst these concerns, Posco (the Korean steel manufacturer) and Arcelor (the US major) have indicated that international steel prices would continue to remain firm in CY04.

    On the domestic market front, the expected rise in industry steel capacity and production could affect the existing demand-supply equation. India has a steel capacity of nearly 34 MT and consumption stands at about 27 MT. Of this, SAIL and Tisco control over 40% of the steel capacity and about 50% of the steel production. Both these companies have plans to increase their production in the next couple of years. While Tisco is raising its capacity from the current 4 MT to 5 MT, SAIL is targeting a production of 10.6 MT in FY04 (10.1 MT in FY03). This could create an over supply situation in the domestic market if consumption were to slow down. That said, companies like Tisco, who have already entered into contracts at current prices for the next quarter or half-year, could be insulated from the volatility in prices.

    Though the industry has managed to display a spectacular performance in the last one year, the above concerns need to be considered. Of course, the benefits of employee rationalisation, lower interest rates and improvement in productivity will continue to provide some sort of leeway for steel companies.



    Equitymaster requests your view! Post a comment on "Steel: Sign of times to come". Click here!


    More Views on News

    Tata Steel: A Strong Quarter (Quarterly Results Update - Detailed)

    Aug 12, 2017

    Tata Steel reported a robust operating performance on the back of strong domestic and European operations.

    SAIL: Loss at EBITDA Level Due to Higher Raw Material Cost (Quarterly Results Update - Detailed)

    Jun 12, 2017

    The company registered a negative EBITDA of Rs 2.64 billion during the quarter. This is on the back of an increase in raw material prices.

    Tata Steel: Strong Quarterly Performance (Quarterly Results Update - Detailed)

    May 22, 2017

    Tata Steel reported a robust operating performance on the back of strong domestic and European operations.

    SAIL: Pressure Continues. Loss at Operating Levels... (Quarterly Results Update - Detailed)

    Feb 15, 2017

    SAIL has reported a 26.2% YoY increase in the topline while the bottomline reported a loss of Rs 7.94 billion.

    Tata Steel: Loss from Discontinued Business Mars Performance (Quarterly Results Update - Detailed)

    Sep 27, 2016

    Tata Steel has reported a 6.3% decline in the topline while the bottomline was in red in 1QFY17.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)