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Steel: Healthy prospects ahead - Views on News from Equitymaster
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  • Nov 26, 2002

    Steel: Healthy prospects ahead

    Steel counters have experienced a dream run over the past 6 months mainly due to firming of international prices, increased domestic demand and exports. But are these gains sustainable? We take a look at factors that are likely to influence the performance of steel stocks in the short term.

    The domestic steel industry has experienced excess capacity and poor prices for a long time. As the economy was liberalized, various business groups anticipating robust demand, set up steel plants. Since the late nineties, steel demand and consequently prices have been at very low levels inspite of a healthy GDP growth during this period. Excess capacity has been the main cause for poor performance of the steel industry.

    The recent increase in steel prices has been mainly due to import sanctions imposed by the largest steel importer i.e. the US. Developing countries were however exempted to a certain extent from these sanctions. High demand growth rate in other big markets like China and Japan have also contributed to the price rise. The realisations, as a consequence, for Indian steel producers have gone up due to these factors. An example of the impact of exports can be gauged from the fact that the price of hot rolled steel have gone up to US$ 250-270 per tonne levels from US$ 150-170 per tonne levels a year ago.

    On the domestic front too conditions have worked out favourably for the steel producers. Domestic demand for steel has been rising due to a considerable rise in infrastructure projects in the country over the last year. The main drivers of this growth have been the highway projects, which have been initiated by the government. A considerable quantity of steel is required to build bridges and other supporting structures along these stretches. The demand for commercial vehicles and consumer durables has also been robust.

    Low interest rates have led to a boom in the housing loans industry. The steel industry has benefited as a large number of housing projects have been started across the country to take care of the increased demand in this segment. Both these demand factors have led to a firming up of prices of steel produced for domestic producers.

    Performance of steel stocks is very much dependent on the fate of steel prices internationally. Indian steel manufacturers have done well to increase their exports to the US where the realisations are higher than domestic realisations. Import concessions may however not last long as US steel producers have already started objecting to these concessions. Prices may see a down ward trend from here if the industry lobby succeeds. But even if these prices see a revision they are not likely to fall to their historic low levels during the late nineties.

    Poor monsoons may adversely affect the domestic demand for commercial vehicles and consumer durables, which are a major source of steel demand. But existing housing and infrastructure demand may be enough to temper down the effects of poor monsoon. Though the prices may drop to more sustainable levels the long-term prospects of the Indian steel industry are intact.



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