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Moneycontrol Pro Panorama | A question mark hangs over the outlook for steel-makers

In today’s Moneycontrol Pro Panorama: The Eastern Window, litmus test for Zee, IndiGo has the edge, Monsoon Watch, the VST Tillers CEO interview, Evergrande and the retail investor, and more

September 27, 2021 / 03:35 PM IST

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

After a spectacular turnaround in the steel industry’s fortunes that’s played out in recent years, here we are again wondering if that run is drawing to an end.

When the insolvency code of 2016 was enacted, steel companies were prominent on the initial list of companies dragged to the National Company Law Tribunal for resolution. Some of the biggest steel companies such as Essar Steel, Bhushan Steel, Bhushan Power & Steel, Electrosteel Steels and Monnet Ispat were put up for resolution.

Bankers found takers as the healthier steel companies saw an opportunity to increase their capacity without going through the long process required for setting up a new plant. The attractive price was another carrot, but a bidding war meant that good assets did not come cheap. The process also saw ArcelorMittal, which has been seeking an entry into India for decades, fulfil its ambition by picking up Essar Steel.

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Steel companies’ run of luck began in the middle of these resolution processes itself, as the steel price cycle began to swing up globally. The fears that credit rating agencies and even investors had, about the impact of funding these acquisitions on their balance sheets, began receding.

The pandemic should have brought the steel cycle crashing. But enter China. The country put up a fiscal and monetary stimulus to counter the economic slowdown. But it also managed to set in motion a massive production surge in metals, which could have again crashed prices but China also absorbed this supply by creating demand for these metals. So much so, it even absorbed part of the world’s surplus during this period.

Steel felt the heat of these moves, perhaps more than any other widely used metal, because China buys its iron ore from the seaborne-export market, from iron ore mines in countries such as Brazil and Australia. The surge in demand for iron ore on the one hand and crimped production—because of the pandemic-induced shutdowns—and of course, China’s steel mills’ willingness to buy iron ore at any price, saw its price shoot up. Iron ore prices rose. From $80 a tonne levels in April 2020, it increased to $170-levels in January 2021 and then a peak of $220-levels in July 2021.

It has now crashed to $120-levels, for a number of reasons.

The most recent event to send prices sliding is the Evergrande episode, with the company appearing to have defaulted on a dollar bond payment that was due last Thursday. If it does not meet this commitment within 30 days, then a default will be official.

The developing situation in China and its impact on commodity prices will be making our steel companies, and investors who have added steel stocks recently expecting the fantastic run to continue, a bit nervous. That’s why our research team has taken a comprehensive look at the situation, evaluated the risks to steel prices, highlighted the counter to a fall in iron ore prices, and then ended with the one stock still worth adding to one’s portfolio. Do read.

Today’s interview: We want to be a Rs 3,000-crore company by 2025, says CEO of VST Tillers Tractors

More investing insights from our research team:

IndiGo versus SpiceJet: Who is ready to gain higher altitude?

Zee Entertainment: Entering noisy territory, should investors worry?

What else are we reading today?

The Eastern Window | Evergrande: A sacrificial lamb to avoid economic disaster

Monsoon Watch 2021 | Season heads for a positive finish

Going forward with the US, one step at a time

Making sense of the race for COVID drugs

The forecast for India becoming a global aerospace hub is bright

How should retail investors deal with the Evergrande crisis?

GuruSpeak | Position sizing and risk management are essential to become a successful trader, says Pathik Patel

Soaring Spac redemptions signal their fall from favour (republished from the FT)

Xi Jinping may be the world’s fiercest tiger parent (republished from the FT)

Technical picks: Jindal SteelBHELNMDC and Prince Pipe

Ravi Ananthanarayanan

Moneycontrol Pro​
Ravi Ananthanarayanan

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