The changing face of steel industry - Views on News from Equitymaster

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

  • MyStocks


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

The changing face of steel industry

Dec 14, 2011

Steel stocks have crashed and have fallen out of favor with investors. The BSE-Metal index has fallen by 38% over the past one year. India steel stocks have been under pressure on account of concerns over global economic growth as well as internal issues such as the ban on iron ore mining in Karnataka. The domestic steel consumption grew by just 2.8% in the first half of FY12 and is expected to grow less than GDP this year. This will be just the second time in the past 10 years that growth in steel consumption in India has lagged GDP growth. In the light of these events, we have identified several trends emerging in the sector which might change the dynamics of the steel industry in India in the next couple of years.

  • Domestic overcapacity will bring in new challenges - India is likely to add around 30 m tonnes of new capacity over the next 18 months. This would make India net exporter of steel from current net importer. As a result, domestic pricing mechanism will slowly but certainly shift to export parity from import parity currently. This will lead to decline in Indian steel company's margins.

  • Product differentiation - Faced with new challenges, Indian companies will need to walk the extra mile to remain relevant in the longer term. Product differentiation, for example, will be necessary. While this may not ensure sustainable margins, it will be of utmost necessity to ensure customer stickiness. In this regard, foreign technological tie-ups and Joint ventures recently signed are a step in the right direction, but most are yet to be tested for success.

  • Changing raw material situation - As easy access to cheap captive raw materials is now a thing of the past. Acute shortage of both coal and iron ore has led to disruption in supply. The ban on iron ore mining in Karnataka has further aggravated the situation. With raw material situation increasingly becoming more complex, focusing on conversion cost and technology will become that much more important.

  • Survival of sponge iron industry at stake - The domestic sponge iron industry is largely concentrated in the unorganized sector and has thrived all these years on the back of subsidised coal linkage from Coal India. Production shortfalls, coupled with priority accorded to power utilities, are making coal sourcing an increasingly difficult proposition for non-power consumers such as the sponge iron industry. Coal linkage to the sponge iron industry has already been cut to around 50% (from 80% two years ago). Furthermore, with volumes in the e-auction market stagnating and more power utilities flocking to this market, this coal sourcing window is also becoming increasingly difficult for sponge iron producers. Margins for sponge iron producers also get impacted as the spread between domestic thermal coal (used by them for steel making) and imported coking coal (used by large blast furnace based mills) contract. With thermal coal prices rising in India and international coking coal prices coming off, sponge iron producers would find themselves in a tight spot. As the 24 m tonne sponge iron industry fights a survival battle, there is a window of opportunity for large mills to capture market share.

  • Increased focus on sales through retail outlets - A strong consolidation theme is already reflecting in a sharp increase in retail sales of all large players. For example Tata Steel reported 46% YoY growth in its retail sales for long products in 1HFY12. While JSW Steel reported 41% YoY growth in 1HFY12 in steel tonnage sold through its retail marketing venture "JSW Shoppe". JSW Shoppe sales now account for 25% of its domestic sales. JSW has rapidly expanded its Shoppe concept and now has 315 retail stores (up from 50 stores in FY09). Other companies such as Essar Steel are also planning significant growth of retail outlets to reach the last mile. This indicates steel marketing in India is in for a paradigm shift and it would lead to market share gains for large steel companies at the expense of unorganised sector.

Indian steel producers have started to adapt to the changing macro economic situation and are focusing more on customers. For example, in Europe, Tata Steel works with an automotive customer 2-3 years before a product launch to understand the client's requirement. On the other hand SAIL has signed a flurry of deals with international companies like Kobe steel and Posco for technology up gradation. Overall, we believe creating product stickiness will be the key going forward, and these joint ventures are making a step in the right direction to shorten the process of moving up the curve.

Equitymaster requests your view! Post a comment on "The changing face of steel industry". Click here!

2 Responses to "The changing face of steel industry"

SK Gupta

Aug 21, 2012

I will be very happy if the export of iron ore is stopped completely. We should have enough capacity in India to make steel and also the specialised steel to meet world wide demand.
Steel industry, like all metals, is cyclical and I am confident that it will revive in time. I wish to stay invested in this sector with a long term view.


Suresh C

Dec 16, 2011

Please comment on China factor in the steel scene of India.

Equitymaster requests your view! Post a comment on "The changing face of steel industry". Click here!

More Views on News

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

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.


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


Sep 25, 2020 (Close)