Heavy Metal Local Vs. Global – US-FOREX.US
As India’s Tata Steel gets ready to declare its earnings later this week, there are signs of green shoots in some geographies in the metals industry. But its albatross, Corus, will continue to drag it down, analysts predict.
While steel may remain in oversupply over the next three to five years, inventory-driven mini cycles can provide good money-making opportunities, says research analyst Neelkanth Mishra. The inflection point in the steel inventory cycle is near, says Mishra, and steel prices and production move together. Steel prices have significant upside from the current levels as production growth picks up.
Manuel Guerena, a director at Standard & Poor’s, sees an increase in domestic demand for steel since India is experiencing moderate GDP growth that should translate into an increase in demand for steel. “The demand growth for steel is expected from [an] increase in infrastructure spending as well as revival in the auto industry following the weak December quarter,” he says.
Tata Steel is the world’s sixth largest producer of steel and will announce its earnings on Wednesday.
In 2007, Tata won a bid for its European rival, Corus Group, for 12 billion. The acquisition was meant to give the Indian company a strong foothold in the European market. Instead, it’s been badly hurt by the global recession and the high costs at Corus.
Tata Steel’s Indian operations are benefiting from stronger domestic demand, says Rajat Rajgarhia, research head at Mumbai-based Motilal Oswal Securities, a financial services firm. Steel production is expected to increase 25% year-on-year in the first quarter of fiscal year 2010 and will ramp-up further in subsequent quarters.
The global picture, however, is not as rosy and demand is expected to drop by 15%-20%. There’s a chance that this may bottom out soon as the destocking in the supply chain is largely over and there could be some revival in demand. However, demand in key end markets such as construction and automotive continue to remain weak in developed markets. High uncertainty among producers regarding the length and depth of the global downturn and the timing and strength of any economic recovery, could also impact future trading levels, says Guerena.
Indian operations have strong cash flows, while Corus is a drag, says Motilal’s Rajgarhia. Corus continues to suffer due to low capacity utilization and high fixed costs. Tata Steel had to further invest 500 million British pounds to win a waiver of debt covenants. Corus will be the key beneficiary whenever demand picks up in Europe. And though Indian operations will benefit from strong volume growth and favorable steel pricing environment in India, cash flows will be routed to Corus and future expansion in India may suffer as a consequence.