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RECOVERY SIGNAL STEEL CONSUMPTION PICKS UP IN SECOND HALF

Rising steel consumption could be attributed to either higher production in end-user sectors, or to re-stocking in anticipation of an improvement in these sectors

A smart pick-up in steel domestic consumption in the December quarter, and one that has continued in January as well, spells good news for steel companies, while it is also signals a recovery in the economy. Domestic consumption in the first half of 2011-12 had slowed down considerably, as the economic slowdown affected demand from end-users in sectors such as automobiles, construction, and infrastructure. Companies had to export to compensate for the domestic slowdown.

Between October and January, finished steel demand has risen by about 9.3% year-on-year, compared to just a 1.8% increase in the first half of 2011-12, according to data from the Joint Plant Committee.

Rising steel consumption could be attributed to either higher production in end-user sectors, or to re-stocking in anticipation of an improvement in these sectors. As of January, the change in inventory shows a decline of 52,000 tonnes, compared to an increase of 124,000 tonnes in the year ago period.

Indian steel companies need domestic consumption to pick up, so that they can sell more of their production to local consumers, where margins are higher. An increase in capacities has meant higher output (even after production cuts) but consumption has not kept pace. In 2011-12, till January, steel production has increased by 6.9%, while real consumption has risen by only 4.7%. The gap has been filled by exports, which rose by 23.9%. But margins on exports are not as attractive as those gained by selling in the local market.

The pick-up in steel consumption comes at a time when interest rates have stopped rising, and are poised to fall in 2012-13. That should see consumer demand in interest-rate sensitive sectors such as automobiles and construction improve, which in turn should benefit steel consumption as well.

Steel prices and raw material prices could have played spoilsport but they too seem to be aligning in favour of steel producers. Prices of flat steel (ex-China) have been stable, while coking coal prices too have been stable. Iron ore prices have declined, and are down by 21%, which could benefit those producers who buy iron ore.

Steel company shares have risen in recent times, and the BSE Metals Index is up 13% from a month ago, though it is still down by 21.4% from a year ago. Rising output at a time when product prices and raw material costs are both stable, is a good sign for steel producers. If this situation continues, the next few quarters should see their performance improve, and reflect in improving valuations as well.

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