6 SEP, 2012, ET BUREAU
MUMBAI: Falling volumes, lower realizations and raw material issues, all combined have battered the business and the valuations of the steel companies. The market has reacted to the performance of the sector and the share prices of the companies have seen a decline in the last two months as against the broader index, Sensex, which increased by 2% in the same period. The sector appears to remain out of market favour for some more time.
In last two months Indian domestic steel prices have corrected 5-6% to Rs 41,000 / tonne presently in line with the trend globally. But a recovery in overseas steel prices of late seems to elude Indian players.
According to Bloomberg, in August '12 steel prices in the US improved 8% M-o-M to $660/ tonne. In Europe also the pressure on prices is likely to recede with announcement of production cuts. At the same time, the iron ore prices have also been falling globally in last five months to $120/ tonne for 63% Fe grade and $110 for the 62% Fe grade.
Nevertheless, these trends are not likely to benefit Indian manufacturers in immediate future. Strong imports from countries like China, where government incentivises exports, or Japan and Korea, which hold free trade agreements with India, mean the domestic steel prices are still under pressure. On the other hand, the mining ban in Karnataka and curtailed production from Goa and Orissa is making Indian steel makers buy iron ore at higher rates. On this background, if the rupee starts appreciating, it could further reduce steel prices domestically to the detriment of the industry.
The only relief for the domestic players comes from the falling coking coal prices, which stood at $175/ tonne, the lowest in last 2 years. This will benefit the domestic players in the second half of the current fiscal.
The Indian steel industry is operating at a higher utilization rate as against the global average of 78%. India's steel production in Apr - July '12 period stood 3.5% up at 25 million tonne as against 24.2 million tonne of year ago period. This is to meet the higher domestic demand, which increased by 7.7% year-to-date and crowd out imports, which took away 10.5% of this consumption demand. However, with large inventory levels in these companies, increase in output by the domestic companies is only going to make matters worse. According to CLSA, "the key factor which is adding to the weakness in Indian steel prices in near-term is the fairly large inventory overhang after 1Q FY13, especially from SAIL and JSPL".
The companies presently trade at the lowest valuations. Their Enterprise Value/ Earnings before interest, depreciation and amortization (EV/EBIDTA) for SAIL and JSW Steel is 5.2 and 4.8 respectively and is trading at four years low. Additionally, the share prices have lost 15-20% of their value since the beginning of FY 12. However, these bottomed down valuations do not make them attractive as the future of the sector remains bleak and the margins are expected to remain under pressure. "We do not see any upside in the industry world over. The situation in India is worse off and it is better to be out of this industry for the coming couple of quarters", commented a metal analyst.
MUMBAI: Falling volumes, lower realizations and raw material issues, all combined have battered the business and the valuations of the steel companies. The market has reacted to the performance of the sector and the share prices of the companies have seen a decline in the last two months as against the broader index, Sensex, which increased by 2% in the same period. The sector appears to remain out of market favour for some more time.
In last two months Indian domestic steel prices have corrected 5-6% to Rs 41,000 / tonne presently in line with the trend globally. But a recovery in overseas steel prices of late seems to elude Indian players.
According to Bloomberg, in August '12 steel prices in the US improved 8% M-o-M to $660/ tonne. In Europe also the pressure on prices is likely to recede with announcement of production cuts. At the same time, the iron ore prices have also been falling globally in last five months to $120/ tonne for 63% Fe grade and $110 for the 62% Fe grade.
Nevertheless, these trends are not likely to benefit Indian manufacturers in immediate future. Strong imports from countries like China, where government incentivises exports, or Japan and Korea, which hold free trade agreements with India, mean the domestic steel prices are still under pressure. On the other hand, the mining ban in Karnataka and curtailed production from Goa and Orissa is making Indian steel makers buy iron ore at higher rates. On this background, if the rupee starts appreciating, it could further reduce steel prices domestically to the detriment of the industry.
The only relief for the domestic players comes from the falling coking coal prices, which stood at $175/ tonne, the lowest in last 2 years. This will benefit the domestic players in the second half of the current fiscal.
The Indian steel industry is operating at a higher utilization rate as against the global average of 78%. India's steel production in Apr - July '12 period stood 3.5% up at 25 million tonne as against 24.2 million tonne of year ago period. This is to meet the higher domestic demand, which increased by 7.7% year-to-date and crowd out imports, which took away 10.5% of this consumption demand. However, with large inventory levels in these companies, increase in output by the domestic companies is only going to make matters worse. According to CLSA, "the key factor which is adding to the weakness in Indian steel prices in near-term is the fairly large inventory overhang after 1Q FY13, especially from SAIL and JSPL".
The companies presently trade at the lowest valuations. Their Enterprise Value/ Earnings before interest, depreciation and amortization (EV/EBIDTA) for SAIL and JSW Steel is 5.2 and 4.8 respectively and is trading at four years low. Additionally, the share prices have lost 15-20% of their value since the beginning of FY 12. However, these bottomed down valuations do not make them attractive as the future of the sector remains bleak and the margins are expected to remain under pressure. "We do not see any upside in the industry world over. The situation in India is worse off and it is better to be out of this industry for the coming couple of quarters", commented a metal analyst.
No comments:
Post a Comment