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is it time for a steel deal?

is it time for a steel deal?

rising global demand and dropping production in China may be an opportunity
November 12, 2021
3 min read
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is it time for a steel deal?

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what’s common to Superman and the Maruti car parked in your apartment basement? they’re both made of steel. not just Maruti, Tata, Ford, Volvo, BMW, and all others too. and not just cars, buildings, appliances, telecom towers, highways, and countless other things as well. so what happens when the production of steel goes down? demand stays up, and therefore prices go high. that very scenario is playing out in the world right now.

is there a way for the smart investor to benefit from this?

what happens in China

...unfortunately doesn’t stay there. the world’s largest steel producer and consumer saw its production drop 21.2% (year-on-year) in September, which resulted in the global output dropping ~9% over the previous year. this was China’s third straight month of contraction in steel output, having reduced by 8.4% in July and 13.2% in August. meanwhile, the global demand for steel is expected to rise 4.5% in 2021. this means that steel prices have rocketed, rising as much as 300% over the pre-pandemic rates.

by contrast, India’s production grew by 7.2% over the previous year for September. local demand is expected to increase steadily after a drop-off in the first half of this year due to the second wave of Covid-19. but if output continues to grow, it could present an opportunity to cater to the pent-up demand in the US, Europe, and elsewhere due to supply chain troubles.

stocking up

the opportunity for the investor then, unless they’re experienced ones dabbling directly in commodities trading, comes from Indian steel stocks. JSW Steel, India’s largest steel company by market cap, recently declared its highest-ever quarterly profits, growing four-fold from a year ago. Tata Steel, not too far behind in terms of market cap, posted a five-fold jump in profits for the July-to-September quarter over the previous year. SAIL, the government-owned steel firm, recently received a vote of confidence from none less than ace investor Rakesh Jhunjhunwala who increased his stake from 1.39% at the end of the previous quarter to 1.76% now.

Arcelor-Nippon, a joint venture between the world’s largest steel producer and the Japanese steel firm, recently announced it would invest Rs 1 trillion in India over the next ten years. further, regulatory spats may result in the EU being stripped of steel concessions from India and other nations soon. this will further augment the bottom lines of steelmakers.

the recency of these announcements suggests that the time may be ripe to invest in these companies. with vaccine coverage fast rising, things are likely to start returning to normalcy. this will lead to an increase in economic activity, and with it, an explosion in demand.