Steel Stocks Outlook: Seen down next week on inflation worriesFriday

[Sukumar]

Steel Stocks Outlook: Seen down next week on inflation worries
Friday Apr 4

NEW DELHI - Persistent rise in the headline inflation rate
coupled with the spectre of price control over the steel industry may
pull down share prices next week.

Wholesale Price Index-based inflation rate for the week to Mar 22
touched a 3-year high of 7%, despite efforts to bring it down to a
comfortable level.

Iron and steel prices shot up 27% year-on-year, mainly on account
of the iron ore price hike announced by NMDC Ltd.

NMDC raised iron ore prices by 47.5% with retrospective effect
from Oct 1.

Since the beginning of this week, the government held three
meetings with different sections of the steel industry and succeeded
in convincing them to hold or cut prices.

On Thursday, after a meeting with leading flat and long products
makers,Steel Secretary R.S. Pandey said two companies agreed to bring
down prices of TMT bars used in construction by about 2,000 rupees per
1 tn.

Companies agreed to bring down prices of galvanised sheets used in
roofing by 500-1,000 rupees per 1 tn and promised to hold prices of
hot-rolled steel coils to the extent possible.

There were a series of measures announced to cushion the small and
medium enterprises against rising steel prices.

But when the entire government machinery is up against inflation,
Indian Railways, fast becoming a cash cow, raised the freight rate on
iron ore.

Steel companies fear the miners will pass on the added burden to
them.

Steel Authority of India, which ferries iron ore from its mines to
its
various plants, said the new freight rate will increase its costs by
450 mln rupees annually.

All this means steel companies' margins get squeezed further.

High global prices of iron ore and coking coal--fuelled mainly by
strong demand in emerging economies of China, India, Brazil, Russia
and West Asia--are often blamed for pushing steel prices up.

The situation is worsening fast. If inflation persists at these
levels
for a couple of months, we are headed for a slowdown.

The government has sent the message loud and clear--it is ready to
sacrifice growth at the altar of inflation.

Companies fear that in order to tame inflation, Reserve Bank of
India may resort to hike interest rates, which in turn, may stifle
economic growth.

Contraction in growth will mean lower demand for steel, as the
construction activity will come down and sales of cars and other
consumer durable goods will fall.

Week-on-week closing prices of key steel companies' shares, in
rupees, on National Stock Exchange:

Company Closing Level Closing Level %
Change
Apr 4 Mar 28

Steel Authority 164.35 197.40
(-)16.7%
Tata Steel 661.40 716.10
(-) 7.6%
JSW Steel 755.20 817.45 (-)
7.6%
Jindal Steel & Power 1,873.65 2,228.90 (-)15.9%
.
Nifty 4647.00 4942.00
(-) 6.0%
Sensex 15343.12 16371.29 (-)
6.3%

N.Sukumar
Research Analyst
www.kences1.blogspot.com