Sudden Slump in the Steel Industry

24 11 2008

The recently concluded Beijing Olympics in August was as much a showcase for China’s sporting abilities, as much as its emergence as an industrial superpower. It was hard to miss the steel structures used in the main Olympics stadium, Bird’s Nest. The Bird’s Nest might not have used more than a few thousand tons of steel, but with the closing ceremony of the Olympics, the light seems to have gone out in the steel industry.

 

The coincidence of the dip in steel demand and Olympics is not just a happenstance. China is by far the biggest producer of steel in the world. In the run-up to the Olympics, it was also a big consumer of steel. It took up huge infrastructure projects, whose completion coincided with the Beijing Olympics. One estimate puts China’s expenditure for Olympics at US $ 42 billion.

 

The sharp dip in demand for steel is reflected by various indicators. The price for steel has witnessed a sharp correction. Although, there is no official exchange for steel like LME for other metals, several newspaper reports indicate the price of steel has fallen by as much as 30-35% from Rs 45,000 per tonne to Rs 30-35,000 per tonne, since August. The Baltic Dry Index (a global indicator for shipping freight, for iron ore and other dry goods) has crashed by 90 % in the last 10 months. The crash in BDI has been attributed to the sharp fall in iron-ore imports by Chinese mills.

 

For the first time since 1981, there has been a decline in steel production in China. Over 85 blast furnaces have been closed down due to the demand slump. The iron ore mines in Goa and Bellary region of Karnataka, who made bumper profits exporting iron ore to China, are facing tough times now. NMDC, the public sector iron ore major, is largely unaffected by the demand slump, because it hardly exports iron ore in the spot trade to China.  

 

Economic Times has reported that over 35 sponge iron units in the Chhattisgarh region have stopped production, in recent months, because of the slump in demand and un-remunerative prices.

 

The steel majors in India. SAIL and Tata Steel reported good quarterly results for the quarter ending September’08. But their outlook is quite gloomy. SAIL has already announced its intention of going slow on its expansion plans by two years. Tata Steel has not made any formal announcement of deferring any of its expansion plans or greenfield projects. But if one extrapolates, the thinking in the Tata group, as expressed by the Group Chairman Ratan Tata is to put all acquisitions and capital expenditure on hold, one can interpret that Tata Steel would also be going slow on its expansions.

 

Global majors like Arcelor Mittal and Corus have reported 20-25% lower production targets, going forward. Arcelor Mittal has already indicated that its India plans will be on hold, until the industry outlook improves.

 

The bleak outlook for the steel industry is reflected in the sharp drop in the stock prices of all steel companies. Tata Steel stock is trading at Rs 165, a far cry from its 52 week high of over Rs 850. The SAIL stock is touching new lows everyday and it is currently trading at Rs 65. The ET Metal index has underperformed the broad-based index considerably in the last six months. The Price-earnings multiple is 3.1 for ET Metal Index against 11 for the broad-based ET 100.

 

My own take on the steel industry is that this slump may continue for a few months, as long as the global housing and automobile slowdown continue.

 

This is a good time to acquire stocks of steel companies like Tata Steel and SAIL in small packets. I prefer SAIL over Tata Steel, because it has no overhang of debt.

 

– G. Mohan

 

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25 11 2008
Venkat Subramaniam

We were speaking to one of the Executive Directors of Bokaro Steel Plant couple of months back, when the slowdown was yet to hit in such a big way.

He was mentioning that between Jan 2008 and Aug 2008, the price of iron ore had more than doubled, and to make things worse, steel prices had come down substantially in those eight months. Bottomlines had almost vanished. As pointed out by Dr. T Mukherjee one of the Board Members of Tata Steel, the price of raw materials sky-rocketing could be attributed to a few companies like Rio Tinto and BHP Billiton who have acquired mines across the world and have created a virtual monopoly.

However, the scenario has completely changed from Aug to Nov 2008. With demand for steel going down due to recessionary trends across the world, iron ore prices have also started declining. The next boom will presumably come largely due to huge infrastructure requirements in countries like India.

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