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Steel sector faces price and demand pressures

Steel sector faces price and demand pressures
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First Published: Thu, Jul 07 2011. 11 15 PM IST
Updated: Thu, Jul 07 2011. 11 15 PM IST
Uncertain market conditions appear to have queered the pitch for metal stocks. The Bombay Stock Exchange’s (BSE) Sensex is down by about 2% since April, while the BSE Metals Index is down by about 6% in the same period. Both indices were tracking each other closely since the beginning of the June quarter, but the broader index has managed to outperform metals by a small margin since June.
Investor concerns about inflation, rising interest rates and slower economic growth will affect basic goods such as metals, which will face the heat from slower demand in their user industries. Exporting their way out of a slowdown is an option, but domestic markets are more profitable and a strong rupee has made exports less attractive.
In the June quarter, investors will seek out early signs of stress on company financials, and seek cues from the management on what to expect in the remaining quarters. Their expectations, of course, are not very high, as seen from the index movement, so even some positive commentary will be well received.
Provisional data released by the Joint Plant Committee shows that India’s finished steel production in the June quarter was down by 9.5% on a sequential basis. Imports fell by nearly 45%, while apparent consumption fell by about 8%. A slowdown in user sectors appears to have curbed demand for the metal.
On a year-on-year (y-o-y) basis, steel output has risen by 8.2%, but is lower than the 12% growth seen in the March quarter. Increasing exports is an option, but steel exports rose by only about 7% y-o-y.
The production figures put out by firms corroborate these numbers. Tata Steel Ltd’s sales in the June quarter rose by 14% in volume terms y-o-y, but are down by 7% on a sequential basis. Another large steel company JSW Steel Ltd’s crude steel output was up by 9% y-o-y, but was flat compared with the March quarter.
During the quarter, steel realizations were under pressure. Soft global steel price trends and a stronger rupee are likely to see realizations either remain flat, or dip sequentially. Domestic firms have been focusing on increasing the value-added portion of their sales, and are expected to benefit from a better product mix.
Tata Steel’s performance, of course, will also be swayed by what happens to its European operations. Tata Steel Europe’s profitability is expected to improve due to higher contribution from value-added products, better realizations and stable raw material costs.
The June quarter is not expected to see a great showing from steel firms, which is reflected in their share price movements. Abetter-than-expected showing by a firm appears to be the only near-term trigger. In the longer run, stronger domestic economic growth and a rise in global steel prices will play a key role in changing investor perception about the sector.
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First Published: Thu, Jul 07 2011. 11 15 PM IST