>METALS: Early recovery in steel prices unlikely, cost increases more certain

􀂄 Mounting inventories at the producers’ end have dashed all hopes of an early recovery
in steel prices. Steel producers, who held on to prices in April and May in the hope
that prices would recover on the back of rising costs, have lost market share to traders,
who cut prices in line with the changing market reality. With diminishing hope of an
early recovery in prices, given continued production growth in China, steel producers
around the world have also begun cutting prices since the beginning of June. However
cost increases are more certain due to recently negotiated quarterly prices of iron ore
and coking coal.

􀂄 Squeezed by price cuts and cost pressure, steel producers are likely to witness
margin contraction. In 1QFY11, margins would be hit the hardest for SAIL, followed by
JSW Steel and Tata Steel India. There would be a bigger drop in margins in 2QFY11.
Though Corus’ management sounded very confident about 1HFY11 earnings when
Tata Steel reported 4QFY10 results, we are less confident about 2QFY11 due to the
change in market conditions post the analyst meet. However, we believe that margins
will rebound in 2HFY11, as market forces adjust steel prices and raw material costs.

􀂄 We are cutting our FY11 EPS estimates by 19% for Tata Steel, by 24% for JSW
Steel, and by 26% for SAIL to factor in the margin shrinkage in 1HFY11. Based on our
revised FY11 estimates, the three steel companies appear expensive. JSW Steel,
however, appears attractive based on FY12 estimates due to expected addition of
new capacities by March 2011. Volume growth will elude SAIL and Tata Steel in FY12.

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