October 4th, 2006 Guest Blogs
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Global output of steel in 2006 is 1215 million tonnes (estimate). This represents an increase of 7.5 percent over the outturn in the previous twelve months and will be the fifth consecutive year that the world’s steel production has exceeded 5 percent.
A number of factors are at work driving such rapid growth. Firstly, strong real demand continues in many important developing/emerging countries. Inventory rebuilding has also occurred in several industrialized nations after the production cuts in 2005. Finally, rising raw material input costs have prompted customers to order in advance of steel price hikes - creating an exaggerated market for steel products.
Last year when steel price plunge, European steel companies cut there production to boost the prices. And they had succeeded. China did some what same, China’s cold roll companies gather to regulate the price and agreed not to sell below specific price.
On the demand side. Gulf countries are spending much on infrastructure funded by higher realization form crude oil. Construction steel demand form gulf are very high. In Asia, Japan upgraded interest rate indicating bullish economy. In China construction projects are still on fire.
The steel industry in consolidation phase. Indian Steel companies are undervalued. Front run companies trading at P/E of 3 to 7 which is quite low compare to other infrastructure based industries. Buying in steel companies is still safe in India. One can expect modest gain over medium to long term.
Due to low cost of production and quality iron ore reserve, India is very attractive for takeovers. Mittal will look to India to buy the facility (steel company). Mittal cannot resist it. If Mittal tries to buy any Indian company you can expect marker valuation of steel companies to be three times of current
levels.
Asif Ahmed Farooqui
Analyst at Managefolio.com
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