Steel: Threat from global recession - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Steel: Threat from global recession

Nov 10, 2001

Steel, which was considered to be a precious metal in early 1990s, is losing sheen. Overcapacity in the industry, falling demand and increasing fragmentation has plagued the growth of this core sector. Recent imposition of anti-dumping and countervailing duties by the US has only added to the woes. Steel industry in pre 1990s was under the government control, particularly the integrated steel sector. But in the early 1990ís, the sector was liberalized and enlisting by the private enterprises was allowed. The way technology today attracts a large number of entrepreneurs, steel was the sector to be in those days. Large numbers of companies were promoted but most of them lacked financial muscles.

Steel being a capital-intensive industry requires high amount of investment. Since the promoters did not bring in capital through equity, financial institutions (FIs) ended up in lending large amount of loans to these companies. The market was booming as a result new projects were flourishing. Consequently, capacity has increased faster than the demand. This coupled with a recent industrial slowdown has widened the demand supply mismatch further. The largest losers in this entire hype were financial institutions.

When these institutions lent to the sector in early 1990s, steel prices were about US$ 330 per tonne and all their projections were based on this price. Today, steel prices are near US$ 210 per tonne. Most loans lent for steel projects are now reflecting in the FIs accounts as non-performing assets (NPAs), recovery for which looks distant. FIs projected the steel cycle to show some turnaround but the situation was worsening. Meanwhile, the debt burden on steel companies increased tremendously since cash flow was under strain due to pressure on realizations. As companies were not having any control on steel prices, they concentrated on trimming cost through working capital efficiencies and full capacity utilization. However, demand supply mismatch and debt burden put them in financial trouble.

There are still no signs of respite. International steel prices continue to remain depressed. This is largely due to sluggish demand in the world markets. According to the latest forecast from International Iron & Steel Institute (IISI), world steel consumption (excluding China) is expected to decline by 2.4% in 2001 to 613 m tonnes. During the first nine months of the current year almost all the large steel producing countries have reported a sharp drop in production. Steel production in France and UK declined by 8%, followed by 11% in the US and 16% fall in Australia. On the other hand, China recorded a strong growth of 11% during the same period. Globally, the steel production is likely to touch 820 m tonnes in the current year, creating an excess capacity of 250 m tonnes. This excess supply is likely to keep prices under pressure at least in the next six months.

World steel consumption: Hopes of recovery?
(in m metric tonnes) 2000 2001 Change 2002 Change
European Union 143 142 -0.7% 145 2.1%
CIS 41 41 0.0% 42 2.4%
South America 27 29 7.4% 30 3.4%
Africa 15 15 0.0% 16 6.7%
China 141 160 13.5% 170 6.3%
Other Asia 197 194 -1.5% 195 0.5%
World 769 773 0.5% 799 3.4%
World (excl. China) 628 613 -2.4% 629 2.6%

In India too the situation is not very different. The impact of good monsoon is unlikely to reduce the excess capacity of 4 m tonnes in the flat product segment. Finished steel production declined by 1.4% YoY in August 2001, after having reported a positive growth rate of 1.6% in July 2001. This decline reflects the fall in production of steel structurals, hot roll (HR) coils and sheets. Prices of HR coils have also seen an erosion of Rs 4,000 per tonne to the current Rs 11,900 per tonne. Any further fall in prices is likely to have a drastic impact, as it may turn many companies unviable.

Apart from waning domestic demand, steel exports have been hit by the global recession. Imposition of anti dumping and countervailing duties by the US has hit future prospects of the Indian steel industry. US being the largest market for the Indian steel exports, trade restrictions have led to oversupply in India. In FY01, India exported 1 m tonnes of hot roll coil (HRC) to US with realization of US$ 265 m. This is likely to come down significantly in the current year.

Slowdown in steel production
('000 tonnes) April-Aug '00 April-Aug '01 Change Growth in Aug '01
Steel structurals 981 843 -14.1% -4.5%
Bars & rods 3,752 4,164 11.0% 15.4%
HR coils 3,524 3,199 -9.2% -16.5%
HR sheets 212 208 -1.9% -14.3%
CR sheets/coils 1,621 1,743 7.5% 15.9%
GP/GC sheets 619 742 19.8% 25.9%
Finished steel 12,221 12,164 -0.5% -1.4%

Apart from India, America has imposed the levies against countries including China, Kazakhstan, Indonesia, Thailand, Romania, Ukraine and Netherlands. As the US has blocked the door for cheap imports from these countries, the same could find its way to India. However, if the Indian government increases the import duty on steel products, domestic steel industry could get protection to an extent. But since India has already agreed to the WTO norms, it might become difficult for the government to increase duties.

The steel industry is going through one of its worst phases. This is also reflected from the financial performance of steel majors. From the state run steel company SAIL, to the largest private sector steel behemoth, Tisco, all companies were hit in the second quarter. The sample of five companies selected here posted net loss of Rs 6 bn in 2QFY02. Tisco has however outperformed the industry even after reporting a 76% drop in profits.

Poor show in second quarter
(Rs m) Sales Operating profits Interest cost Net profits
SAIL 33,993 (217) 4,022 (3,287)
Tisco 19,320 2,875 952 275
Ispat Industries 4,512 (343) 870 (1,767)
Essar Steel 4,777 (53) 1,593 (928)
Jindal Iron and Steel 2,575 74 317 (240)

The downturn in the sector globally is a cause of concern for the Indian steel companies in the near term. It is for the first time that the industry has faced the dual impact of a global recession and a sluggish domestic demand. Indian steel companies are working towards geographically demarcating markets where each one will operate exclusively without competing to tackle this slowdown. However, scant demand from construction and consumer durable sector is unlikely to help in pushing up the growth rates.


Equitymaster requests your view! Post a comment on "Steel: Threat from global recession". Click here!

  

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

I Recommended this Stock over Page Industries because it's Relevant to Doubling Your Income (Profit Hunter)

Sep 7, 2020

Things are not often what they seem in the market and how you can take advantage of this.

The NASDAQ Whale Could Harm Your Portfolio (Fast Profits Daily)

Sep 7, 2020

The discovery of Softbank pushing up prices on the NASDAQ will cause volatility in the market. Stay alert!

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE METAL


Sep 18, 2020 01:15 PM

S&P BSE METAL 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS