Steel stocks under margin cloud

The steel sector has been in the limelight for many reasons. Prices of steel scrips are rising in tandem with the repeated bouts of price hikes being announced by steel companies, but concerns over shrinking margins are surfacing now.

Market sources say that the buoyancy in steel stocks in the last one-and-a half year was fuelled by improved pricing power of producers which reflects the serious demand-supply mismatch in global markets.

But input costs are also increasing, and the industry has reached a point where it is reacting to the hikes in input costs. This means, the hikes in prices will be margin-neutral at best.

The Steel Authority of India (SAIL) scrip has surged 331 per cent from Rs 10.15 on January 1, 2003, to Rs 43.70 on February 24, 2004.

Tata Steel has risen 193 per cent from Rs 151.25 to Rs 443.70 over the same period, Essar Steel was up 110.87 per cent, Ispat Industries surged 70.88 per cent, Jindal Iron and Steel rose 330.92 per cent, Jindal Vijaynagar Steel was up 94.86 per cent, Kalyani Steels moved up 173.44 per cent and Uttam Galva was up 68.57 per cent in the same period.

Domestic steel manufacturers have hiked prices of hot-rolled coil (HRC) by up to Rs 4,000 per tonne to around Rs 27,000 per tonne, effective this week.

Analysts say this sharp rise in domestic prices is a natural follow-up of the surge in international HRC prices to an all-time high of $560-$570 per tonne.

In the international markets, steel prices have nearly doubled from around $300 per tonne in June-July 2003. Also, there is the push-factor of rising input costs of raw materials such as iron ore, coke and scrap.

With scrap exports from the US reduced drastically after the levy of high export duties, China has banned export of coke to protect its local hot-rolled coil makers.

A steel industry analyst said, "There is a tremendous shortage of scrap and coke in the global market because of export restrictions by the US and China. This shortage is likely to push HRC prices further up in the coming months."

In keeping with rising prices and output, iron ore miners have also started raising ore prices. In the meanwhile, reduced supply in the global market has led to a rise in coke prices.

Further, higher international trade has resulted in higher freight rates. The steel sector has been riding on rising consumption from various end-users including construction, automotive, home appliance and ship building industries which have led to an overall growth in domestic demand.