>India Steel (RBS)

India Steel Sector

A tentative Recovery.....

Our visits to the Indian steel producers suggest that they are expecting a recovery in sales volumes, though prices remain weak. The government could raise import barriers further, protecting the industry from import competition. Demand-boosting measures, however, may take longer to execute.

* Production recovering and prices stabilising

The Indian steelmakers have raised production volumes from the low levels of Nov-Dec and they expect sales volumes to improve qoq in the Jan quarter. However, sales volumes could still be down yoy. The volume recovery has so far not led to a price recovery, though prices have stabilised in February after a continuous decline over Sept 2008-Jan 2009. A strong price recovery looks very unlikely, as visibility remains low.

* Government actions may aid industry, but timing in question
The government has announced several measures to protect the domestic steel industry, and we see the possibility of more, such as a further rise in import tariffs. Currently, however, we highlight the risk of delays, in decision-making and execution, due to the upcoming elections (probably in May/Jun 2009).

* Costs should decline, leading to EBITDA improvements
The possibility of lower input costs is well known, particularly for imported coking-coal contracts, as new prices (which we forecast will be 60% lower) are to become effective from July. Efforts to renegotiate prices for remaining contract volumes for Jan-Jun 2009 are ongoing, and any success would be positive. This should boost margins for domestic steelmakers, which have remained profitable during the price downturn.

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