Weak metal

The current fall in steel prices will further hurt local producers already grappling with rising input costs.

Several steel companies have announced a cut of Rs 700-1,000 a tonne to around Rs 26,000 a tonne for HRC (hot rolled coil), as the landed price of imported steel was 3-5 per cent lower than the domestic prices. Steel prices had earlier shown firmness since mid-February, after a gap of nearly eight-ten months.

The current weakness in steel prices is once again attributed to surging production volumes in China. In addition, construction activity, traditionally, weakens during the monsoon season and, hence, leads to some slackness in domestic demand for steel, analysts say.

International Iron and Steel Industry (ISSI) "� the Brussels-based global industry body "� pointed out that Chinese steel production between January and July surged 18.9 per cent y-o-y to 236 million tonne.

Also, the repeated steps taken by the Chinese monetary authority to curb growth in the country's construction sector led to Chinese steel exports jumping 22 per cent y-o-y to 18.9 million tonne in the first six months of CY06, the UK-based consultancy ISSB said.

Domestic steel production had also shown a growth of 15.7 per cent y-o-y to 24.3 million tonne during the first seven months of CY06, according to ISSI.

The current decline in prices will hurt domestic steel producers further, as they are currently grappling with rising costs of inputs such as iron ore and freight.

On the positive side, analysts say, once construction activity normalises after the monsoon, steel prices could pick up once again.

Steel stocks, however, get a very low discounting given continued investor fears of rising Chinese capacity. Tata Steel, for example, gets a discounting of 6.1 times its estimated FY07 earnings, while for SAIL it is 4.7 times.

Grasim Industries: Chinese booster

By acquiring a stake in Hubei Jing Wei Chemical Fibre "� a VSF (viscose staple fibre) manufacturer in China, Grasim will gain access to the VSF market there.

Grasim will take a little over 30 per cent stake, while two other Aditya Birla group companies in Thailand and Indonesia will buy almost 40 per cent in the firm.

The group will pump in about $70 million for the 70 per cent stake. The Hubei Jing plant in China is operating at its full capacity of 30,000 tonne, and the Aditya Birla group plans to raise it to 60,000 tonne by December 2007.

Domestic VSF prices have risen around 17 per cent y-o-y to Rs 85,000 a tonne, while in China they are slightly lower.

The opportunities for VSF are strong in China and south-east Asia, and this acquisition will provide the group an entry into China, where the VSF market is estimated at around one million tonne a year, about four times India's size, though it is highly fragmented with around 25 players, say analysts.

On the other hand, Hubei Jing's present capacity is just about 11 per cent of Grasim's domestic capacity. Therefore, the 30 per cent stake will have only marginal impact on the Indian company's financials in the near future. The Grasim stock trades at about 14-15 times its FY07 earnings.