Despite the government’s obvious nervousness about inflation, some analysts had nursed a lingering hope that it would take into account the equally obvious rise in the cost of inputs such as coking coal and iron ore before asking steel producers to hold the price line. But the decision by the steel producers to reduce prices of both flat and long products for three months must have squashed that forlorn hope. What’s the impact? Here’s what Enam Securities had to say on the subject in a recent research note: “Scenario 1: price freeze—ex-factory prices fixed at the current level: steel industry impact—zero profits; capex plans in limbo; bankruptcy for non-integrated producers.”
Some analysts maintain, however, that even without government intervention, steel prices are in risky territory, primarily because they are seeing it wreaking havoc on the construction sector. Global steel consultant MEPS has recently revised its Asian steel price forecasts upwards, but points out that the outlook for the second half of the year is uncertain owing to the slowing global economy.
International steel stocks such as ArcelorMittal, Posco and Severstal are at or near their 52-week highs, a far cry from what has happened to steel stocks in India. Nevertheless, the steel stocks’ reaction to the government’s move has been muted, possibly because much of the bad news is priced in.
Tata Steel Ltd in particular has been an exception, moving up on Thursday in a weak market. Not only do its captive iron ore resources cushion the impact of lower domestic steel prices but it also benefits from the strong pricing environment in Europe. Perhaps the market is expecting the government to clamp down on iron ore prices next.
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