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Steel consumption to rise in India

By Equitymaster
July 07, 2009 11:45 IST
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Steel sector witnessed a roller coaster ride in FY09, wherein the first half of the fiscal witnessed a significant spurt in demand due to expanding oil and gas sector, large infrastructure spending coupled with growth in housing, consumer durables and auto sectors.

However, the third quarter experienced a significant fall in the steel demand on account of the global financial crisis. Difficult times prevailed until the Reserve Bank of India and the Central government announced various monitory & fiscal initiatives and thus, the demand once again started picking up during fourth quarter of fiscal.

Currently, with the government's increased emphasis on the infrastructure, we believe the sector is poised for significant growth over the medium to long term.

As a matter of fact, India's per capita steel consumption continues to be low at 46 kg as against the global average of 198 kg. Thus, this further strengthens our belief that the potential ahead for India to raise its steel consumption is high.

 Budget Measures
  • Increased focus on infrastructure development. IIFCL to refinance 60 per cent of commercial bank loans for PPP projects in critical sectors over the next fifteen to eighteen months. IIFCL and Banks are in a position to support projects involving total investment of Rs.1 trillion.

  • Allocation under Jawaharlal Nehru National Urban Renewal Mission (JNNURM) increased by 87% YoY to Rs.1.3 trillion in 2009-10.

  • Allocation for housing and provision of basic amenities to urban poor enhanced to Rs.39.7 bn in 2009-10.

  • Blueprint to be developed for long distance gas pipelines leading to a National Gas Grid to facilitate transportation of gas across the length and breadth of the country.

  • Increase in tax exemption limits for citizens.

  • Fringe benefit tax (FBT) abolished.

  • Rate of minimum alternate tax (MAT) on book profits has been increased from 10% to 15%, but with a provision of carrying forward the tax credit on MAT to ten years from the current seven years

     Budget Impact
  • Increased focus on infrastructure development would result in development of highways, ports, bridges etc, which will consequently increase the demand for steel.

  • Increased spending on government programs such as JNNURM scheme will result in higher steel consumption.

  • Plans to cover long distance gas pipelines would mean increase in demand for steel pipes and tubes.

  • Increase in tax exemptions for citizens would result in higher disposable income that will likely trigger increased demand for consumer durables, white goods etc, thus eventually boosting the demand for steel.

     Company Impact
  • Increase in spending on infrastructure to be beneficial to major steel players like SAIL, Tata Steel and JSW Steel which accounts for more than 35% of total steel production capacity in the country.

  • Increased spending on urban and rural development schemes, especially housing and other infrastructure are likely to increase the demand for long steel products, a positive for companies like SAIL and Tata Steel, which have a large dealer network spread across the country.

  • Plan of developing national gas pipelines is a positive development for companies like Welspun Gujarat Stahl Rohren and Maharashtra Seamless.

  • Increase in demand for auto and consumer durables will result in rise in consumption of flat steel products, thus companies like Tata Steel, JSW Steel and SAIL are poised to seize the opportunity here.

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