The steel sector is likely to underperform the market and the steel majors, Tisco and SAIL have underperformed the market over the last quarter by over 10 %, say a report by Kotak Securities. The stocks will continue to underperform at least over the next quarter as results for fiscal 1997 will be discouraging.

Production and inventory: SAIL has ended fiscal 1997 with a negligible growth in production at 8.9 mt while Tisco produced 2.81 mt of saleable steel, a growth of 4.1% over last year. We think slow growth in production for SAIL was a function of rising inventories; inventories of finished steel were up 95% to 0.78 mt at end of fiscal 1997. Production by secondary producers continued to witness negative growth (since October production has grown negatively y-o-y); February production showed a sharp fall by 32 % y-o-y. We think negative growth during the past five months is a function of slow down in demand and rising inventories.

Consumption: The apparent consumption (production + imports - exports) of finished steel during the period April-February 1997 was 4% higher than corresponding period last year; the consumption figures confirms our concerns over demand growth in fiscal 1997 (demand grew by a high 15. 7% in fiscal 1996). We estimate consumption growth of 4.2% for fiscal 1997 .

Exports of finished steel increased by over 35 % to l.O mt during the first eleven months of fiscal 1997.

Prices: SAIL has announced price increase on its flat products by around 3-7 % since April 1997; however, prices of long products have not been increased. We think given high level of inventories with SAIL, the price hike may not be affected completely. We believe SAIL has tried to ride the global price increase in hot rolled coils (prices have increased by 5-7% during last quarter). Tisco has not yet announced a price increase. We think price increases by SAIL are more cost push in nature (due to cost increases in fiscal 1997) than demand led.

Sector Outlook: We estimate weak steel market during first half of fiscal 1998 due to inventories with users and manufacturers; we expect demand to grow at around 4 per cent during this period. Although we expect demand to pick up during second half (y-o-y growth 6 %) and by an average 7.5% during 1998 we think pricing flexibility for manufacturers will be weak particularly for hot rolled coil manufacturers) and margins of domestic producers will continue to be under pressure.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.