Will the going get tough? - Views on News from Equitymaster

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Will the going get tough?

Oct 21, 2000

The Indian steel sector has been on a high in recent months. Demand and prices have been surging, in both domestic and global markets. This has resulted in a significant improvement in the financial health of the sector. During the first half of the fiscal year, domestic demand for steel grew by 10 percent. This was due to the rise in construction activity and increasing demand for consumer durables. The entry of new players in the auto sector too has raised demand for steel. Production of steel, however, raced ahead posting an 11 percent growth as companies capitalized on the more lucrative realisations in international markets. Indeed, in volume terms, exports grew 20 percent during the period.

However, at present, the steel sector looks vulnerable. Domestic demand, which surged early this year, has been affected by the slowdown in overall economic activity. This is largely due to the drought witnessed in parts of Western India, the floods in some eastern areas, rising crude prices and finally a not-so-good monsoon due to which growth rates for agricultural output have been slashed to just over 1 percent from over 8 percent in FY99. These developments have also impacted investment activity and contributed to the slowdown in the industrial and services sector.

Apparent domestic steel consumption
('000 tonnes) 1HFY00 1HFY01 % change
Domestic Production 11,409 12,665 11.0%
Imports 723 760 5.1%
Exports 1,177 1,415 20.2%
Domestic Consumption 10,955 12,010 9.6%
Of which:
Flats 4,488 5,165 15.1%
Longs 6,467 6,845 5.8%

Another factor that is affecting realisations in the domestic steel markets is the fact that fresh capacities have gone on stream in recent months. This has led to a situation of over supply, especially in the more lucrative flat steel products market.

In the international markets, the key driver of demand last year and early this year was the recovery in the European and Southeast Asian economies. Japan too chipped in as it tried to shake of the recession. Also, the US economy continued to remain strong. However, this year growth in the Southeast Asian region is anticipated to stabilize. Then, there are concerns whether the US economy will be able to sustain its fast rate of growth. Finally, the surge in crude oil prices is anticipated to hit global demand (investment and consumption). All these factors will impact the consumption of steel. Already, steel prices, over the last one-month, have corrected sharply.

The near term concerns notwithstanding, the Indian steel sector still holds a lot of potential. Consider this: the per capital consumption of steel in India is a meager 20 kilograms per annum as compared to 80 kilograms in China and 325 kilograms in South Korea. With infrastructure spending in India anticipated to perk up considerably in coming years, the consumption of steel is anticipated to grow significantly. This will improve the pricing environment for steel companies.

Another factor that needs to be dealt with in respect of the international steel sector is the large scale dumping that takes place globally. A couple of years back it was the Indian markets that was the target for dumping steel products. Since then the tables have turned and Indian companies have been accused of dumping steel in select markets. Indeed, the US has imposed anti dumping duties on steel plates imported from India even as other countries debate on a similar move. In light of the implementation of the World Trade Organization (WTO) guidelines, under which duties on imports are to be reduced, this issue is anticipated to receive increasing importance. Indian companies would obviously be looking for some sort of import from their international peers.

The domestic steel sector is undoubtedly having one of its most profitable years in recent times. However, as if in sync, challenges facing the sector also seem to be mounting. It remains to be seen whether this dream run for the steel companies will continue for a while longer.

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