After a lacklustre performance throughout the year, Nomura expects near-term pick up as rupee depreciation makes steel imports dearer which will revive local demand

The steel industry has been in the doldrums for the entire 2012 but Nomura’s Equity Research expects a pick-up in the near-term. Several companies, according to media and broker reports, are sending signals that an uptrend could be imminent as they raise steel prices, indicating demand pick-up. Nomura said, “With rising global prices, and the rupee depreciation, we expect net imports to moderate from current levels. At the same time India would be entering a seasonally strong demand period and hence we expect demand to pick up from current levels.” The company is bullish on Tata Steel and Steel Authority of India (SAIL).
 

Nevertheless, Nomura expects near-term scenario to be beneficial for companies with expansion plans and value added products. “We believe Tata Steel’s 2.9mpta capacity, which is ramping up production, to be a key beneficiary of India being a net importer—with increased production from Tata Steel in Q4FY13.”
 

The steel industry is commoditised and value-addition is hard to come by and requires lot of capital expenditure.
 

Similarly, SAIL, which has been performing below-average, could do well as the company pushes for volumes and price cuts to get rid of its glut. It is surprising to note that India is a net importer of steel despite companies like SAIL having excess inventory. However, Nomura has cited the weak rupee and high global prices as reason for domestic demand to pick-up.
 

Historically, high fragmentation, economic woes in developed countries meant steel demand had been overall weak with benign sales. But slightly higher demand from China meant steel price didn’t dip and was steady if not sideways. India is a net importer of steel, which means the rupee depreciation would lead to dearer steel imports. This could force companies to buy locally instead, thus inciting demand pick up. Nomura thinks that there is a “mismatch between demand and produced material”
 

There’s also another factor—iron ore production has plummeted due legal and political problems in Goa. This is the raw material for steel. Limited supply and strong demand would mean an upwards bias in steel prices which would provide fillip to companies like Tata Steel and SAIL. It also added that “high value added products i.e. Tata Steel and JSW Steel have maintained their volumes in the above mentioned scenario (i.e. excess imports and slack in local demand).”
 

According to the government, India is expected to become the world's second largest producer of crude steel in the next two years on account of capital expansion and investments in new projects.
 

To read more stock research analysis by Moneylife on basis of Nomura research, click here.