>Global Steel 2010 (RBS)

We attended the Global Steel conference hosted by Gujarat NRE and The Economic Times last week at Goa. Various industry reps and analysts spoke about steel demand in India, the raw material pricing environment and the way forward for steelmakers. We sum up conference highlights here.

■ Near consensus on domestic expansion story
Speakers at Global Steel 2010 cited the 2020 steel-capacity projections of various agencies that ranged from 110mt to 293mt. However, there was near consensus on the strong growth expected over the next two to three years, as a result of expected strong demand backed by the current low per capita steel consumption and access to cheap raw materials. Potential negatives were land-acquisition delays, infrastructure bottlenecks and a lack of adequate coking coal resources domestically. Despite the strong resilience of domestic steel markets, versus world markets that are in the doldrums, speakers believed domestic steel players had recently missed a big opportunity to improve backward integration levels, due to their overleveraged balance sheets. For example, Sesa Goa was sold to a non-steelmaker and

■ Dempo was sold to Sesa Goa.
More analysts bullish on coking coal; times to get tough for non-integrated producers Most speakers and analysts appeared more bullish about coking coal than iron ore in the long term. They expected iron ore prices to peak next year and coking coal prices to remain high for a sustained period due to the poor prospects of existing finds delivering the desired coal on time. On the other hand, they expected scrap prices to continue to be volatile. We also see a need to increase exploration and discovery of new coking coal assets.

■ Our view: positive near term; repetition of 2008 likely if steel demand recovery slips
We expect steel prices to spike over the next two to three months, aided by strong seasonal factors that should almost entirely flow through to the bottom line. However, we expect the real challenges to begin after July-August, as steelmakers exhaust their low-priced iron ore and coking coal supplies. Current spot prices of iron ore and coking coal are more than 80% higher than contract prices, indicating significant price increases for FY11 raw material contracts. Based on historical movements, the market expects steel stocks to follow the direction of profitability and outperform up to June-July. However, after that period, it expects stocks to underperform depending on the strength of the economic recovery.

To read the full report: GLOBAL STEEL