Strength in Steel – India bucks global trend

Most steel companies believe steel demand in India is on an upward trajectory and expect double-digit growth in FY11E, led by infrastructure and autos. Majority of the steel expansion projects are running behind schedule – constrained by land acquisition and procedural hurdles. In our view, with no major capacity expected to commission in 2010, we estimate Indian net imports to reach an all time high of 6.5 mn tonnes.

Most steelmakers expect the additional input costs to be passed through in the form of higher prices and to maintain a strong EBITDA spread – with limited push back from consumers and government.In order to leverage their captive thermal coal resources, metals / steel companies are now diversifying into power generation, driven by attractive IRRs and ROEs.

JSW Steel – JSW Steel’s management expects higher steel prices in the near term, primarily led by cost push. While they expect steel prices to rise by US$60-US$80/tonne in April (already announced), in their view, these prices may not be sustainable into 2QFY11, on account of a slow down in activity during monsoons. Demand-supply mismatch in the domestic market prevails – Primary/integrated steel producers have benefited the most. Higher raw material prices would not be sustainable in the medium term. The company is confident that it would be able to sustain strong margins (EBITDA/tonne) and is making strong efforts to improve upstream integration.

Tata Steel – Tata Steel’s management is bullish on domestic steel prices in the near term and expects Rs3000-4000/tonne increase in prices in April. They expect Indian operations to maintain robust margins in the coming quarters. In its European operations, after the earnings turnaround in 3QFY10, the company expects to consolidate the position over time. Corridor work at Tata Steel’s greenfield steel project at Kalinganagar, Orissa has started. Corus is operating at 90% capacity utilization.

SAIL – SAIL’s management is bullish on domestic steel prices in the near term and expect the steel industry to pass on the input costs, they do not expect the prices to reach peak levels seen in 2008. Steel prices at US$700/tonne are sustainable, as per management. SAIL is targeting production growth of 5%-6% in FY11E. The expansion plans will propel the next phase of growth for SAIL starting from FY2012.