The Hindu Business Line : Steel stocks jump on price hike hopes

THE steel stocks have, of late, been climbing on expectation of declaration of price rise in finished products. However, much of the market recent buzz over the steel stocks is speculative, according to analysts.

Since February 28, gains in Tisco and SAIL counter have been marginal, but smaller producers such as Uttam Steel and Essar Steel improved at higher rate because of export content in their specific product field.

Moreover, major producers are perceived to be bound more by long-term contracts, hence lesser impact on margins through declared price hikes.

The market expectation is that prices of both hot and cold rolled coils may see a sharp rise. But the market also apprehends that key inputs such as pig iron and sponge iron are also poised for a price hike. "The impact of the price rise, likely to be announced next month, for different producers could be varied owing to respective backward integration linkages in terms of inputs, technology and product portfolio," said an industry observer.

Moreover, ratio of products under long-term contracts to spot market determines the margin benefits. According to a senior SAIL official, less than 10 per cent of the products was meant for the spot market. "In terms of long products, room for manoeuvrability in price is limited, even though the producers are broadly free from governmental intervention", he added.

The steel industry has already seen a steep hike in raw material price in the last one year and this may continue for a while. Prices for inputs such as iron ore, coal, scrap, sponge iron, and manganese have gone up varying between 15 per cent and 50 per cent in the domestic market in the past one year whereas prices in the international market have been marked up even higher.

Mr Deepak Jain of Anagram Stockbroking pointed out that a Brazilian mining company has recently hiked iron ore price by 71.5 per cent while renewing the contract with Nippon Steel.

"In the domestic market, long term iron ore prices are expected to witness a jump of around 50 per cent in the next fiscal", he added. Excise duty on steel items has been hiked in the Budget to 16 per cent from 12 per cent.

According to a fund manager, some Indian producers are somewhat insulated from the spiralling input costs owing to captive mining facilities orlong-term supply tie-up at home. But increasing demand from steel items here and abroad has generated confidence that an across board price increase may be absorbed.

"The overall margin after compensating for input cost in the 2005-06 may improve because of a significant demand-supply gap", the fund manager observed.

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