To say that 2008 was a lacklustre year for metal stocks would be an understatement. The BSE Metals Index was the second worst performing index in 2008 second only to real estate sector, having fallen by nearly 75 per cent. Within the A group, Tata Steel was the worst performing stock losing 77 per cent though others didn’t fare too much better — Hindalco and Sterlite both gave up close to 75 per cent and SAIL was just marginally better off, losing 72 per cent. How will 2009 be like for this set of companies? The first half is likely to be difficult with the recession in the larger economies expected to keep demand subdued.
With auto majors General Motors and Ford close to bankruptcy and demand for cars in European markets too rather weak, the demand for steel and aluminium from the auto sector doesn’t look like it’s looking up in a hurry. Steel prices softened by close to 40 per cent last year and with the off take getting slower, Arcelor Mittal, the worlds largest steel maker announced production cuts to the extent of 30 per cent; even Tata-owned Corus was forced to scale back production by about 30 per cent. The bad news is that China appears to be slowing down.
According to the National Bureau of Statistics, Chinese steel output fell 12.4 per cent in November to 35.2 million tonnes. China is the world’s largest producer and consumer of steel and in recent years a booming local housing market has absorbed much of its production. Besides, it has also been a fairly large exporter. Unless demand in that market picks up, prices are unlikely to firm up, say analysts. Back home, lower interest rates and property prices could trigger a revival in the real estate sector and push up demand for steel and aluminium, but that may not happen soon. Already, in 2008, JSW steel and SAIL scaled back production and prices too were trimmed. Unless the auto and housing sectors see a revival, the demand for metals should stay subdued.
Valuations of metals stocks are attractive; Tata Steel trades at around 2 times while Hindalco trades at about 5.4 times its estimated 2008-09 earnings. However, the outlook for the sector remains uncertain.