>Asia tilts scales in global steel market (ELARA CAPITAL)

■ Global demand set to rebound from CY09 lows
Steel production worldwide is showing a steady revival after suffering a major setback in Q3CY08 due to the financial turmoil. Going ahead, we expect China and India to lead the demand growth for steel in CY10 and CY11. The World Steel Association (WSA) estimates the steel demand growth to be 12.4% in CY10, primarily driven by China with the developed world likely to register a muted expansion in demand.

■ Demand – supply balance seen in China and India
With the rising demand in the developing world, we expect the Chinese as well as the Indian mills to continue to operate at a healthy utilization levels of 85 – 90%. With no new large greenfield capacity visible in the near term, coupled with the fact that the Chinese regulations are compelling small and inefficient blast furnaces to shut down, we expect the Chinese and Indian steel markets to remain in balance. Although the developed world is expected to operate at 65 - 70% utilization levels, the high cost structure in those parts of the world makes the movement of steel into the developing world unviable at the current prices.

■ Steel prices to nudge upwards by 10-15%
We expect steel prices in the Chinese region to settle at least 10 – 15% higher, driven by the cost push factor as well as the market dynamics which indicate that steel markets in the region would remain in balance with little threat of overcapacity. We believe that steel prices in CY10 would settle at a higher level riding the following: (a) an increased cost of output thanks to higher contract price settlements for iron ore and coking coal (b) no oversupply scenario in the developing world and (c) a sustained higher cost of production in the developed world which nullifies the import threats from these regions (despite a lower capacity utilization level).

■ Valuation
Indian steel companies are likely to see benefits of firm steel prices and a no-surplus market in FY11 and FY12 despite the big capacity additions. We like the ‘volume story’ and expect large players with big expansions to benefit from the favorable steel pricing scenario. JSW Steel with its healthy volume increment remains our top pick as we believe that such a spurt in volumes would offset its lesser level of integration as compared to peers. We recommend a Sell / Switch on SAIL to JSW as we are circumspect of its ambitious expansion programme, the timeline and continuous upward revisions in its capex plan. We are neutral on Tata Steel and see an overhang of Corus on the consolidated performance.

To read the full report: INDIA STEEL