Steel volumes: On an upward spiral

The recent spurt in the Dollar Index, which has moved up nearly 2 per cent since mid-November, may play spoilsport.

Two of India’s largest steel companies – Tata Steel and JSW Steel — reported a sharp rise in volumes during November, indicating healthy underlying demand. While Tata Steel’s domestic sales jumped 35 per cent year-on-year to 498,000 tonnes, JSW reported a 123 per cent surge in its crude steel output to 480,000 tonnes. The higher volumes come on the back of improvement in demand from construction, white goods and auto sectors.

Metal stocks have outperformed the Sensex since early this year due to rise in prices; steel prices at the LME have nearly doubled to $500 a tonne. For now, analysts feel that the recent spurt in the dollar index, which has moved up nearly 2 per cent since mid-November, may play spoilsport as the uptrend is likely to continue for some more time. Tata Steel and SAIL also slashed prices across categories by Rs 1,250 to Rs 1,500 a tonne in November.

Another factor that is expected to keep prices under check is the threat of imports from China, which currently has a production capacity of 610 million tonnes (MT).This is much more than it can consume. Moreover, another 50 MT is expected to go on-stream in 2010.

Analysts also expect contract prices of inputs like iron ore and hard coking coal to increase 20 per cent and 25 per cent, respectively, in 2010-11. The increase in input prices poses some risk to the profitability of steel majors; however, the impact would depend on the quantity of input bought from the non-captive sources.

Yesterday, the share price of Tata Steel was up 2.2 per cent, while that of JSW Steel jumped 6.7 per cent. Given the recent rally in the steel stocks and an uptick in the dollar index, analysts recommend to wait for the prices to cool-off from current levels rather than taking the plunge right now.