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Steel: Sign of times to come - Views on News from Equitymaster
 
 
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  • 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.

     

     

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