Stock watch: After the struggle, some signs of strength

Stocks of steel makers zoomed in 2016, after a dismal performance in the earlier year. Tata Steel’s share price nearly doubled and smaller steel makers such as Usha Martin also saw significant positive price action. There were a few reasons behind the sudden investor exuberance in this cyclical sector.

First, the minimum floor price was introduced for many imported steel products in Budget 2016-17.

This move put in place a mechanism to control cheap imports, while shielding domestic steel makers from dumping of low-priced steel by other countries. Imports of total finished steel declined 37 per cent year-on-year in the first nine months of 2016-17 to 5.5 million tonnes (mt).

Second, steel production jumped 10.5 per cent during April-December in 2016-17 over the same period of last year, to 73.8 mt. Higher production aided exports, which climbed by about 58 per cent year-on-year in the first three quarters of 2016-17.

Third, global steel prices rallied sharply, due to positive surprises from China. construction and infrastructure spending improved during the year while production capacity was slashed. As a result, metal prices raced up by about 80 per cent in the international market during the year.

Lastly, local consumption continued to witness decent growth. India’s consumption increased 3.3 per cent y-o-y in April-December, 2016-17, beating the global blues.

While the global steel price and demand outlook appears stable, local steel makers have their job cut out.

Last year, price performance raced ahead of performance and steel makers may need to work harder to build on their strengths. State-owned SAIL for instance has been grappling with operating losses. The PSU has been adding capacity and needs strong demand growth to improve utilisation and turn profitable.

Other players such as Tata Steel have their share of issues. The company is saddled with high debt and there are uncertainties regarding its UK business unit sale.

Bucking the trend of sober performance was JSW Steel – the company’s profits surged from a low base, thanks to cost efficiencies of its new units.

There are raw material cost concerns as well. Prices of coking coal and iron ore shot up last year due to fall in supply and sudden demand revival.

The hike is likely to impact steel sector’s profitability in the second half of 2016-17. The sector has a strong policy support – the government is mandating the use of locally produced steel for its projects.

Local steel makers may look forward to better days thanks to policy tailwinds as well as price stability emanating from improving fundamentals in countries such as the US.

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