Steel, classically regarded as the skeletal frame of economic development, is back in the consciousness of Indian investors. Incipient signs were in evidence nearly two years ago, when the US infuriated free trade mavens with protectionist measures for its domestic industry, and then lowered barriers for steel from sources such as India. Since then, much has changed in the world steel scenario. Europe's steelmakers are still furious with America, but otherwise, the industry is looking up. Global circumstances have conspired to shave excess capacity, push up demand and raise steel prices (after some hiccups). Indian steelmakers, meanwhile, have been forging ahead determinedly to crimp costs and try ascending the value scale to escape the sweaty furnace of commoditisation. The latest cause for jubilation, however, has come from the Eastern hemisphere. China has increased its quota of steel imports from India. The domestic industry mood has been quite upbeat even otherwise. And as the performance figures come in, the sector's turnaround story has gained a large measure of credibility. The proof, as they say, is in the numbers (See On The Comeback Trail).

Sustained Price Rise

While the last rally in steel was mostly speculation, say analysts, the story this time round is different. "In the last cycle," says Bhavin Chheda, Senior Analyst, Pioneer Intermediaries, "where there were speculative positions built up by traders and the steel prices crashed when the inventory was released, this time round the demand would absorb the inventory." Prices are currently up by about 18 per cent from the last big fall, in March. Step back and take a look: the steel price trend is upwards, even if gradually so.

Global Demand Up

Indian steel makers are amongst the lowest cost producers in the world. In other words, they are not overstating their prospects when they speak of global demand and the state of the global market. So how is the global market doing? Rather well, as it turns out. Most analysts trace the sustained price rise to robust demand for steel in China, where the infrastructure boom is showing few signs of letting up. The prospect of becoming a global cynosure for the 2008 Olympic Games must, no doubt, be a contributing factor to all the activity.

On the whole, the interest component is down sharply, easing pressure on margins

Moreover, international comparisons suggest that development becomes suddenly more steel-intensive once an economy approaches the $1,000 GDP-per-head level. And this can set off a chain reaction as well, since all the glass-chrome-and-steel on the landscape plays an unofficial role in impressing visitors and attracting foreign direct investment (FDI).

Domestic Development

India's construction and automobile sectors are booming again, which is good news for domestic steel demand. The Union Budget for 2003-04 has announced a total outlay of Rs 60,000 crore for development of roads, rails, airports and seaports, to be spread over the next few years. This could spell additional demand in excess of one million tonnes of steel.

"A lot of activity is happening on the road front in the country," says Paras Adenwala, Fund Manager (Equities), Birla Mutual Fund, "There is a lot of fresh asset creation largely as a result of the demand from the government's focus on infrastructure spending. This will have a cascading effect on the general demand."

Global Supply Stabilising

Make no mistake; commodity steel is a cyclical business. "We are yet only half way through the typical 18-month steel cycle," says Chheda. Adenwala agrees, "There is yet an upside left in the steel sector."

And what after that? "No major capacities are coming up before 2005," continues Chheda, "as such, there is no supply overhang; it is likely to be well distributed." Being a fairly mature industry, and thanks to the burst in global information availability, the amplitude of the supply troughs and waves (over-corrections, typically, in response to prices) may actually be reducing over the years. Which may mean more stability. But then, again, non-systematic uncertainties argue against such a placid view.

Remixed Offering

A few Indian steelmakers, unhappy with their product's unglamorous status as a commodity, have been hard at work trouncing 'marketing myopia'-the trap of seeing themselves as steelmakers rather than satisfiers of some need.

Is this getting them anywhere? At its most basic level, it has meant a reconstitution of the product mix to include value-added offerings-even custom-specified to an extent. "Though they are not as flexible as technology companies in offering solutions," says Adenwala, "the value addition is showing in the operational profits of steel companies. While the internal efficiencies have increased, the volumes too have jumped. Better realisations have led to better margins."

Customers are impressed with what's on offer, and that's what counts. "TISCO is our top choice," says Chheda, "Most sales are long term contracts spread out evenly. The company should easily maintain the bottomline growth for a while now."

Financial Re-engineering

The recession helped in one big way-thwacking the finances into shape. On the whole, the interest component is down sharply, easing pressure on margins. "The ratios of steel companies are hard to believe," remarks Adenwala. Some companies insulate themselves from cyclical traumas by entering long term contracts (TISCO), while others (like Jindal Strips) offer specialised products, less vulnerable to price fluctuations. Companies such as Essar and Ispat are relatively dependent on commodity spot markets, however, which makes for greater quarterly volatility.

As for results, TISCO reported an excellent quarter ended June 2003, with net profit of Rs 267 crore, up from Rs 64.2 crore in the same period last year, on sales of Rs 2,257 crore. This, after already having turned in all-time high profit of Rs 1,012 crore on sales of Rs 10,517 crore for the fiscal year 2002-03.

Jindal Strips, too, reported an outstanding quarter on account of increased export volumes and hardening steel price. Sales for the quarter ended June 2003 went up to Rs 539 crore, compared to Rs 428 crore achieved in the same quarter last year. Net profit tripled to Rs 49.4 crore. "For Jindal strips, debt has been reduced over a period of time, while the equity too is on the lower side at Rs 18 crore," says Chheda.

India's biggest steelmaker, the state-owned sail has also reported a turnaround in the quarter ended March, though the accumulated losses continue. This firm is currently in talks with Bechtel Corporation, USA, to ship steel to the Middle East for the reconstruction of Iraq.

All said, the sector is back in the reckoning-and looking sharp. Professional equity investors will be tracking every twist and turn of the story. Retail investors are likely to get interested too, but they had better stay clued in.