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Steel: Targeting exports - Views on News from Equitymaster
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  • Jun 14, 2003

    Steel: Targeting exports

    Starting end 2001, there has been no looking back for the steel sector. Buoyed by the spurt in global demand and prices, there has been a marked improvement in profitability in FY03. While domestic demand for steel has been growing at a steady pace, increasingly, players are aiming at global markets. And going by the trend, export market offers significant growth potential.

    First, consider the domestic steel sector. Total steel production in FY03 registered a rise of a shade over 7% while the domestic consumption increased by over 5%. With the global steel sector to have grown by 6% in FY03, prices started moving upwards. This is reflected in the graph below. This benefited Indian steel companies in terms of better price realisation. Given this growth, profit grew at a faster rate, after almost three years of depressing state.

    However, all the credit need not be given to the domestic consumption alone. Exports also had an important role to play, if not a major part, in the improvement of performances of steel companies. In FY03, steel exports from India spurted almost 37%. And in this case, China had an important part to play. Infact, iron and steel was the largest export item to China in the January-March 2003 quarter, which registered a growth of over 2000% YoY to about US$ 294 m. This is also higher than US$ 262 m of steel exports in the whole of 2002.

    Why China?
    The simple reason is that the government’s focus seems to be directed at improving infrastructure. Apart from re-building a couple of cities in wake of Olympics 2008, the country is expected to spend significantly on dams. It must be noted here that China is deficient in steel production as its steel production capacities rest at about 180 million tonnes while its consumption needs are in the range of 210-220 million tonnes. This shortfall is met in the form of imports by the country, which in turn keeps steel prices buoyant.

    Dependence on exports
    Company Exports as % of sales
    SAIL 11%
    Tata Steel 14%
    Essar Steel 34%
    Ispat 40%
    Jindal Steel 48%
    Source: Tisco analyst meet

    Obviously, it makes sense for Indian companies to look at China as the next best export destination. Since players like Tisco are cost competitive on a global scale, one is optimistic over the long-term.

    HR coil cost comparison
    Companies ($ per tonne)
    Tisco 150
    Arcelor 210
    US Steel 240
    Posco 180
    Nippon 240
    Nucor 210

    However, all is not so rosy as it seems.

    • Higher exports by Indian steel majors have already created ripples among the US steel manufacturers. Just to highlight one of the cases, US steel producers have been lobbying hard with the Bush administration for imposing of duties on steel imported from India.

    • Indian companies are very small in size, in the global context. There is not enough efficient capacity to meet the kind of demand China may require to import. Therefore, not all players will benefit. Steel is after all a commodity and the most efficient will benefit the maximum.

    • Steel sector is cyclical in nature. Considering the run up in prices in the last two years, sustainability is a cause of concern.

    However, ending on a positive indicator, the start to FY04 has been a positive one for the domestic steel industry. Finished steel production registered a growth of over 9% in the month of April 2003 as compared to the corresponding period last year. The demand for steel also showed a positive growth with consumption growing by 5%. Moreover, steel exports in April-May 2004 have increased by 40%. Though these are positive signs for an eventful FY04 for steel players, it is wise to exercise caution.



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