>Metal Sector (MOTILAL OSWAL)

We believe pressure on steel prices has eased due to better visibility on cost structure despite poor demand

· Japanese mills settled coking coal annual contracts for 2009 at US$129/ ton, which disappointed steel producers who were targeting much lower prices and are left to buy carry over quantities of 2008 contracts at old prices. Though iron ore prices are yet to settle and there is no sign of demand recovery, there is now better visibility over the cost structures for 2009, which may not allow further price correction. Steel producers would rather cut production than offer lower prices. Billet prices have recovered marginally last week. We believe pressure on steel prices has eased.

· Spot iron ore prices continue to remain under pressure due to rise of inventories on ports, poor pig iron production and rise of imports in China.

· We believe easing of pressure on steel prices and correction of input costs will revive margins and the strong volume growth of 67% (largest among Indian steel company) will drive earnings for JSW Steel. Stock is trading at 45% discount to FY09 book value. We upgrade JSW Steel to Buy.

· Hydro, U.C. Rusal have cut production of aluminium and alumina further.

· Base metal prices have rallied on continued state buying by China at a premium, less disappointing US economic data, fear of dollar weakening and speculative inventories building by traders. Sterlite, a diversified base metal producer, is the key beneficiary.

To see full report: METAL SECTOR