Executive Summary

Executive Summary

Steel demand remains buoyant, underpinned by China; Outlook encouraging

Global steel consumption has grown at a CAGR of 5% over CY00-05, the strongest in any five-year
period, underpinned by strong growth across all emerging economies led by China. The International
Iron and Steel Institute (IISI) expects world steel demand to grow 7.3% in CY06 to 1.08 bn MT and then
to continue growing by 5.8% to 1.15 bn MT in CY07. India demand is at an inflexion point that promises
to convert it into a key player on the world stage, both as a producer and a consumer of steel.

After softening last year, steel prices recovered and remain firm

After reaching a peak of USD 600 / MT In CY05, steel prices started falling – on the back of inventory
de-stocking and threat of oversupply from China. In a show of rare producer discipline, there were
concerted cuts in production across the globe to support prices from falling steeply. Global steel
industry had finally come out of the “tonnage syndrome”. After correcting by over 30% within a few
quarters, and strongly supported by the robust demand momentum, steel prices have subsequently
recovered and are currently about USD 550 / MT. Going ahead, prices are expected to remain firm and
range-bound.

Structural change in cost structure due to high input costs

While steel making capacity went on rising at a steep pace, the raw materials market fell behind. Years
of under-investment in mining capacities and project delays due to shortages of equipment, personnel,
etc. have kept the raw material market tight. Hence, with prices of key inputs like iron ore and coking
coal soaring by over 163% and 140%, respectively, over the last three years, the cost structure of non-
integrated steel producers have undergone a structural move upwards.

India well positioned to emerge as a competitive steel production base

With abundant reserves of high quality iron ore and steam coal, competitive labour costs, high domestic
demand growth drivers, and proximity to key consuming markets of Asia, India is well poised to emerge
as a key producer and consumer of steel. This has led to large capacity expansion projects being
pursued – both by existing domestic producers as well as several large international majors.

Integrated players to benefit the most

In a scenario where raw material prices have gone up substantially over the past few years due to global
tightness, vertically integrated players with access to key raw materials will benefit the most. In the
metal value chain, the miners i.e., the raw material producer, capture the largest chunk of value.
Besides value maximization, in an anticipated tight supply scenario, sourcing of the raw material itself
may become strategic, going ahead.

Valuations remain undemanding

Indian companies in the ferrous space are currently trading at undemanding valuations vis-a-vis global
peers. With cleaner balance sheets, capacity expansion projects, backward integration, and forays
into high value-added products, India’s ferrous sector is at an inflexion point to create substantial value,
going ahead. We remain bullish on the sector and recommend ‘BUY’ on Tata Steel, JSPL, Usha
Martin, Monnet Ispat, Adhunik Metaliks and Sesa Goa, and ‘ACCUMULATE’ on SAIL, JSW Steel,
Bhushan Steel & Strips and Jindal Stainless.