The December Index of Industrial Production numbers show basic metals and alloy output having risen by 5.8% from a year ago. But the capital goods industry presents a more interesting picture, having risen by 38.8% in the same period. Growth rates may, of course, settle down at lower rates than this but it will still signal a revival in industrial and construction projects. In addition, the residential real estate market has seen demand recover though the commercial real estate continues to lag. These factors all point to better demand for steel, a principal input in these sectors. In addition, sectors such as automobiles and consumer durables, other key steel consumers, too, are seeing sustained recovery.
An improving demand outlook will translate into higher volume growth for Indian steel companies. In India, in the April-December period, steel consumption rose by 8.4% to around 46 million tonnes (mt) while production grew by 3.8% to 44 mt. India’s steel production is expected to increase by 12% in 2010 compared with 9% in 2009, according to JSW Steel Ltd. This will be in the backdrop of higher global steel consumption, primarily led by emerging markets. While production is increasing, the pace is not fast enough to threaten steel prices even as rising cost pressures—iron ore and coking coal—are putting a floor under steel price forecasts.
The risk from rising domestic steel capacity seems low at the moment. Around 5 mt of capacity will come into the market in the second half of 2010, according to a Goldman Sachs India research report. But it expects supply to lag demand till 2011, when larger capacities will come on stream. There are risks from rising costs, which could affect margins, but Indian companies are relatively insulated from these risks due to captive sources of raw materials and captive power capacities. The Goldman Sachs report upgrades Tata Steel Ltd to a buy from neutral and JSW from a buy to a conviction buy.
Graphic: Ahmed Raza Khan/Mint
If all appears in favour of Indian steel companies in 2010, the fly in the ointment is the Budget, which may contain a road map to withdraw the fiscal stimulus. Its timing and extent is likely to have a direct effect on the steel industry, as excise duties become higher. End user demand is another risk, for example, if automobile sales grow at a slower rate. This is an uncertainty which could affect all sectors, including steel. But in spite of these risks, it’s very likely that the Indian steel sector is set to enjoy a good year in 2010.
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