Steel and cement demand usually rises in tandem. Both are essential construction materials and the demand is essentially driven by construction activity. Both are also commodities which means materials must conform to standard specifications but branding can generate slightly higher margins for companies that have good marketing strategy.
Cement doesn’t travel well. This can lead to local mismatches in supply and demand but it also means that there is some natural protection against imports. Steel is relatively easy to transport, which means that local prices are inevitably affected by global prices.
Global over-supply hit Indian steel prices hard for several years. Some of the biggest loan defaults across the Indian spectrum came from the steel industry. Essar Steel, Bhushan Steel, Monnet Ispat, etc, all hit the skids with insolvency proceedings. Other steel majors struggled for profitability and barely kept afloat. However, the industry lobbied successfully, for duties that protected the domestic industry against steel imports. This may have worked to some extent.
The National Steel Policy sets ambitious targets, envisaging tripling of capacity by 2030-31. The policy target capacity of 300 million tonnes (mt), production of 255 mt and per capita consumption of 158 kg by 2030-31, up from current per capita of 61 kg. The policy also envisages domestically meeting the entire demand of high grade steel, special alloys for strategic applications and increasing domestic availability of washed coking coal so as to reduce import dependence on coking coal. This would require at least Rs 10 lakh crore in additional investments across the steel value chain. This would make India the second-largest steel producer in the world, behind China.
India has a domestic over-supply of cement which has led to low prices and consolidation over the past few years. There is little pricing power within the industry. Both steel and cement incidentally have been hit by crackdowns on illegal mining practices with courts penalising certain iron ore mining practices in Goa and Karnataka and bans on sand-mining hurting the cement industry.
But, the most major problem in both industries is weak demand. The construction industry is in bad shape and so is real estate. This has meant flat demand and even falling offtake.
The monsoons also have a seasonal impact obviously as construction stops, or slows. The construction industry is desperately hoping that there will be a pickup in activity once the rains stop. That could be driven by faster implementation of infrastructure projects and by faster government clearances and more government investment in areas such as urban renewal and housing.
Infrastructure growth fell to a 19-month low in June and July is unlikely to be much better due to seasonal factors. The impact of GST on a semi-organised industry like construction will also be severe. Construction has many unorganised elements in the value chain and tax offsets are not available for those.
Given all the constraints, both industries delivered fair to middling results in Q1. The Q2 will probably see a seasonal fall. If there is a demand pickup post-monsoon, it would have to be driven in the first stages by government spending. Private sector capex will take time to follow through.
There’s been a fair amount of anticipatory investment in steel and cement stocks in the hopes of a revival. If it does come through, we could see a situation where earnings rise steeply and share prices rise but valuations fall despite that because earnings growth outpaces investment. If the market gets tired of waiting for a pickup, or there is no earnings growth in Q3, there will be sharp corrections across both sectors.
via Correction likely in cement, steel firms’ stocks | Business Standard Column
