UBS :: Steel Sector - Domestic steel demand hitting a soft patch

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UBS Investment Research
Indian Steel Sector
D omestic steel demand hitting a soft patch
􀂄 Demand slowdown led by long product segment
According to media reports, domestic steel demand grew just 1.5% to 16.4mt in
April-June 2011, while production grew 8.2% to 17.0mt and imports declined 52%
to 1.3mt. While flat products (April-May 2011) are growing at 8% (16% growth in
FY11), long product demand has declined (-13% YTD vs 2% growth in FY11).
􀂄 Long product demand softness in line with slowdown in cement sales
Infrastructure activity slowdown is also confirmed by a slowdown in cement and
commercial vehicle (CV) growth: 1) cement sales of ACC/Ambuja/Ultratech
(~33% of Indian cement sales) increased only 0.7% in April-June 2011. 2) CV
growth slowed to 4.5% in April-May 2011 (32% growth in FY11). Passenger
vehicle growth slowed to 11% YTD (29% growth in FY11).
􀂄 Steel traders, small manufacturers not buoyant on demand outlook
We spoke to a couple of traders and small manufacturers who are concerned about
the weak demand and do not expect much of a turnaround in demand in the near
term. The key reason for demand weakness has been slow ordering activity by the
government and consequently, weak construction/infra demand.
􀂄 Expect demand to improve in H2: pick-up in infra space; MoEF approvals
We expect demand to improve with a lag in H2 on a recent pick-up in ordering
activity in the road/power sectors (please refer to ‘India Infrastructure: Positive
momentum in power and roads’ dated 30 June 2011 by UBS analyst Sandip
Bansal). We expect marginal downside to our estimates for Tata Steel and JSW
Steel. Although Indian steel stocks may not perform in the near term due to this
macro weakness, Tata Steel remains our top pick.
􀁑 Although most large-cap steel companies are still talking of healthy demand,
we believe a slowdown (especially in infrastructure) is apparent with the
above numbers.
􀁑 While steel production has increased 8% to 17mt, consumption has increased
only 1.5% to 16.4mt.
􀁑 However, exports during April-May have increased 71% to 0.78mt, which
may provide some cushion to the sales volumes of the larger companies that
we cover.
􀁑 Imports have declined 49% in April-May 2011 to 0.9mt.