Sector Specific - Steel Industry
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Steel Sector (Updated - 10 Jan 2010)
Rising demand, controlled supply and strong buying by steel end-users in anticipation of a price rise are likely to drive up steel prices over the next few quarters, according to analysts tracking the sector.
The demand of steel, ex-China, is likely to rise from 650 million tonne (mt) currently to 800 mt per annum by April 2011, says a report by brokerage house Credit Suisse.
After hitting a high in July-August 2008, steel prices declined more than 50-60 % in the aftermath of the global recession. The sector is witnessing a rise in demand with more orders coming in from automobile industry.
Top steel exporter China is also logging an improvement in demand with inventory levels (stock-piled in 2008) declining appreciably over the past few months. These factors have resulted in prices moving upwards over the past few months.
According to Credit Suisse, demand for steel (ex-China ) is set for a potentially significant recovery over the next few quarters. “It is dangerous to try and call the top of this cycle, when the cycle has barely even commenced its upturn,” the report added.
India the steel majors like SAIL and Tata Steel have already hiked prices by up to Rs 2,000 per tonne with immediate effect on the back of rising demand. Steel manufacturers have also withdrawn discounts and rebates given to end-users during low-demand . The sector analysts opine that Indian companies are in a sweet spot to enjoy the recovery in global steel prices, due to captive iron ore and strong domestic demand.
“Indian demand has remained strong, despite the global slowdown, and Indian steelmakers have enjoyed high operating rates resulting in robust performances. We expect profitability to increase further, with higher steel prices and limited raw material cost increases,” said a recent steel report by Nomura
(Japanese broking giant). The Japanese brokerage has upgraded its steel sector outlook from neutral to bullish.
The general consensus among equity analysts is to go long on the sector and add more steel to equity portfolios. Though steel as a sector have hit real demand, stocks have not seen much of an acceleration up till now. Analysts are seeing a cycle that is far stronger than market or consensus earnings forecasts. The upside for steel equities could be much higher, analysts opine.
“Indian players stand to benefit the most from firm steel prices. We expect iron ore prices to increase by 30% (close to $20/tonne) next year. However, we believe Indian players will not be affected by this, owing to their captive mines. Profitability of these companies could go up next year,” added the Nomura report.
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