Fadeout for steel?

UBS has downgraded the sector on concerns over rising Chinese exports

Is the best behind the steel industry? At least, that's what Swiss-based broking house UBS has pointed to in its recent report on the global steel sector. It has downgraded the sector to neutral due to concerns of rising Chinese exports of this metal which could depress prices.

China's exports of steel products have grown 67.09 per cent in the first nine months of CY2005 to 8.63 million tonne. Also, its imports fell 15.17 per cent during the same period to 23.93 million tonne. The surge in Chinese exports was on account of higher steel prices in the western markets.

Surging Chinese steel exports pose no immediate threat to the domestic steel industry as local prices are still lower compared to import parity prices.

However, in the medium term, the viability of expansion plans being implemented by domestic steel companies looks uncertain given China's import substitution strategy and the growth of its steel exports. Domestic steel capacity, currently estimated at 32 million tonne, is set to rise by approximately 15 million tonne in the next four-five years.

Meanwhile, authorities in the Middle Kingdom have given permission to 3 plants to produce approximately 16.5 million tonne of high grade steel and these steps would enhance Chinese steel capacity to an estimated 323 million tonne by 2007. China has traditionally imported high value steel products and these amounted to 37.2 million tonne in CY2003.

However, Beijing plans to eliminate these imports by mid CY2007, which could be bad news for Indian companies, as China accounted for a significant portion of the 6.4 million tonne of HRC exported by them in H1FY05.

No doubt, domestic sales are expected to grow 6-7 per cent over the next few years but unless new export markets are found quickly, there remains the possibility of over-capacity being built up in the domestic market and consequent pricing pressures.

Telecom industry

Integrated telecom operators or those offering both mobile and long distance services, will gain from the new rules allowing differential pricing of tariffs. These players can now charge varying tariffs for their own subscribers and those of other telecom operators.

The users of stand-alone networks that are dependent on other operators for long-distance services, could end up paying higher tariffs.

Besides, operators with a pan-India presence like Bharti and Reliance will also benefit as they can customise packages including voice and data services for their users.

The biggest beneficiary is expected to be BSNL, who has the largest land-line network and is also one of the leaders in the wireless space, as it can charge a lower tariff for its land line users making calls to its mobile subscribers.

Needless to say, it would gain more after its merger with MTNL, which would give it access to the Mumbai and Delhi circles.

Meanwhile, the growth in BSNL's GSM subscriber base in November fell to 2.3 per cent compared with 5.7 per cent in October, which according to analysts was on account of capacity constraints.

However, MTNL's capacity increase and re-launch in November appears to have helped its GSM subscriber growth with additions of over 70,000 subscribers.

BSNL's low growth dragged industry numbers, with the net additions in the GSM segment slipping to 1.14 million last month from 1.22 million in October. Bharti's growth at 3.9 per cent, too, was slightly lower than in October. The overall numbers are disappointing especially since November was a festive season.

Derivatives market

Foreign institutions have continued to pour heavy sums of money in the equity markets this month, but the markets seem to be teetering after having reached the 6300-mark earlier this month. With the cash market looking undecided about future direction, what clues does the derivatives market provide?

The first thing that strikes about the derivatives market is that its open interest (outstanding) position is near an all-time high at around Rs 15500 crore.

A high outstanding normally calls for alarm bells, but in this case one has to adjust for the Rs 1500-odd crore added to the market's total open interest due to the addition of TCS and NTPC in the derivatives market.

Besides, most stock prices are near record highs, which in turn inflates the open interest position in value terms. In terms of number of contracts, the outstanding position is further away from its all-time highs.

The put-call ratio, or the number of put traded vis-a-vis the number of calls traded, has been inching up lately. On Thursday, it hit a high of 1.3 and based on a 10-day moving average, it has gradually increased from 0.77 in end-November to 0.96 currently.

The only occasion the 10-day average has been higher than 0.96 for the Nifty was when it peaked at 1.03 last December.

When investors are willing to write a higher number of puts (writing puts involves assuming unlimited downside) relative to calls, it simply indicates that a higher number of people are willing to bet that the markets will not fall.

The trouble is when a majority of the market begins to think so (indicating extreme bullishness) and that's why markets generally peak around the time or a little after the put-call ratio does. Since the indicator is not far away from its high, it may be worthwhile to keep track of it.

With contributions from Amriteshwar Mathur, Shobhana Subramanian & Mobis Philipose