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Sunday, December 18, 2011

Steel sector:-Industry outlook/prospects/competition/high and low prices/beneficiaries/listed stocks/recommendation/demand-supply/views/potential

Steel companies have largely underperformed broader benchmark indexes since the beginning of the year. This is primarily due to the steep rise in input prices, chiefly iron ore and coking coal. Consequently, operating profit margins have shrunk. Also, the Reserve Bank of India has been consistently raising interest rates in an attempt to cap the growth in inflation. This has not only pushed up borrowing costs for companies, but has resulted in sluggish demand from user industries like construction, infrastructure, and automobiles. Therefore, steel makers have not been able to raise prices and pass on the raw material price rise to their customers.

From a global perspective, the euro zone debt crisis has curtailed growth in construction and housing as well. As these sectors account for half of the total steel demand in the region, the slowdown adds to the downward pressure on global steel prices. Over the past few months, the price of hot rolled sheet steel, which is used in cars and appliances, has declined nearly 10% in Europe and 25% in the US.

Adding to the industry's concerns, industrial production growth in China, the region's largest consumer of steel has fallen by some percentages point.Meanwhile, global steel production has fallen over 50% from January 2011 to date.

Earlier in the year, the World Steel Association had forecast a 5.9% rise in global steel demand to 1.359 billion metric tonnes in 2011 and a 6% rise in 2012 to 1.441 billion metric tonnes in 2012.

But there could be some relief for steel makers as coking coal and iron ore prices have fallen since April, albeit marginally. While prices remain higher compared with last year, some analysts expect contract prices for coking coal to fall below $300/tonne by the december quarter from the current levels.

Indian steel manufacturers are likely to raise prices by 500-1,000/tonne or about three per cent in the present quarter. This follows a ban on iron ore mining in Karnataka. The state accounts for about 25% of the country's iron and steel production, and the ban will impact miners as well as steel makers.

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