Steel : what's in store

from time-to-time, it’s worth sitting back and looking at the big picture; the long-term; over-the-horizon. It’s a useful thing to do. It provides some perspective.

Considering the global steel output since 1950 we can look at 3 cycles.

1950-73 – steady growth. Post-war investment in North American infrastructure; the development of the automobile; reconstruction in Europe and the emergence of Japan. All drove steel production and consumption higher.

1973-98 – stagnation. The oil shock; light-weighting in cars, packaging, construction and increased efficiency. The end of investment in Europe and North America led to demand falling and only partially offset by the growth in emerging Asia.

1998-2014 – the emergence of China. A country of 1.4bn people industrialised and moved from the country to the city; a development model specifically based on steel-intensive capital investment.

...... And now?

The first two cycles lasted 25 years; the last one has been 15 years.

Europe, North America and Japan (25% of global steel consumption) are mature consumers where steel consumption will perhaps grow 1% over the longer-term, and even that is under threat from aluminum in the automotive industry and lightweighting and efficiency elsewhere.

China (50%) has peaked. Construction is 70-80% of demand and that is a one-off use of steel. Once cities and roads are built, they don’t need to be renewed for a while. Steel consumption has peaked and could fall by 20% from here over the next decade.

Emerging economies (25%) were expanding, but in many cases, they were investing the super-profits of commodity gains from oil, metals and agriculture — from China. Without that bulwark, capital expenditure may plummet.

That means we could be in for a long period of stagnation and decline — 15-20 years based on previous cycles

 

Commodity players are never good investment.I had Tisco, Hindalco,Vedanta in my portfolio for a long time.They did not give any return to me even in last aprox a decade.Tisco price is half from 1991.I had get rid of Hindalco and Vedanta.Still holding Tata steel in search of opprtunity to down load.Metal stocks are trading stocks or cyclical play.I will never buy metals in future, as I don't play cycles nor I trade.My first learning had been never invest in poor quality,second has been never invest in PSU and third has been never invest in commodity or metals.

 

All names you mention are excellent companies in their field.. Certainly multibaggers if you get the timing right and ride on the initial upswing of the product cycle. All otber times they are pretty much like sleeping tigers...

So its all about timing but unfortunately the windows open up after long periods of time and remain available for short periods.

I made reasonable money on SAIL and Hindalco the last time around and so have decidec to have metals on my radar this time around.. investing into any names is likely only a few year from now unless the govt waves a magic wand and a China like emergence happens with India.

 

In my humble opinion investing in steel companies is better left to extremely patient and passive investors who do not look at their scrips for 8-10 years or who can wait in a scrip for 8-10 years without making any profit.

For very small investors like us (me atleast ) with limited capital and who cannot afford to be extremely passive for 8-10 years it is better to look for some other secular growth stocks which offer reasonable growth and certain visibility.

A very bad thing about commodity stocks is that they become "cash traps" if you get your timing wrong. You have to wait for years and years to get your principle amount back. For eg those who invested in tisco 3-4years back will have to wait for another maybe 3-4 years to see their invested amount. They are even losing interest amount on their investment.

Its a very slow agonising process of sliding down for some years, then consolidating for some years and then moving up for some years to reach the level where it was 8-10 years ago.

Such things are better left to the biggies who can bear such long painful years of wait. Even a small twist of events may make the turnaround get postponed by 5 years.

Also, after many years of downturn when atlast the commodity cycle turns around it is extremely uncertain how long it will last. Therefore in my humble opinion the best thing for small time investors like us is to try and find secular growth stocks rather than trying to time commodity cycle.

I have never invested in any commodity stock in my very short investing career of 11 years and I don't feel like having missed out on anything or having been left out. I never had the feeling to venture out towards commodity stocks since I am short of other ideas. In fact it was always too many ideas and too little money to invest.

 

In essence not very different from what my thread is all about. Just that you havent seen a SAIL move up from 3/- to 3 digits

 

A couple of exceptions to a general trend will always be there in every sector.

And I am not denying the wealth creating capacity of commodity sector. They do become multibaggers when cycle changes. Its just that there are always similar stories in other sectors where the waiting period and pain are lesser

 

So kindly share the general trend that prevailed in the metals space say betwwen 2002-2006...

My recollection tells me Sail went from sub par to over 100/-, Tata Steel from ~100 to over 500 ( with a stock split), Hindalco up from ~500 to ~ 170,

Would be suprised if other well managed metal companies dont show a similar trend.

 

Frankly metals isnt a play for novices.... At an opportune time metal stocks (with possibilities of a 3-5x) over 3-5 yrs are better plays than the 'flavours of the season' or 'popular stocks doing the rounds' then.

 

Yes agreed, timing is key.Has that time come?More over Tata steel to greater extent and Hindalco to a small extent has spolied their old Indian story with global foolishness.They have gone to a recession territory from a devolping economy.

 

Like i said earlier actual investment is probably a few years away.

But a global footprint and scale does matter in commodities. So i disagree that going global was foolish. Choice of target company certainly warranted a closer look - acquiring a bigger company than yourself and culturally or with a operating/business model and management style wide apart is very difficult to succeed... And if you getting the timing wrong, certainly god wont step in to help you. Tata - Corus is a fine example to back this up. Around the same time the RBS take over of Abn businesses turned out to be a disaster due to bad timing... Sir Fred Goodwin (the CEO then) would have been named the 'Banker of the Decade' had not the financial markets imploded. You might require two pair of hands to count the wealth erosion this caused.

 

What's your view on MCX?

 

Dear Farhan Ghumra-,I realy don't know too much about this stock.But after Kotak Mohindra management,now company seems to be in safe hands. Many big investers are also on board including RJ.In my view as commodity are heading south,so naturaly business may be low .When ever commodities will bounce back or at least stablise, will result into stable business. Risk which I don't know ,if NSE is also allowed to start commodity trading.I realy don't know regulatory or competitive issues in details.You need to have proper guidence or study further some where else,but quality of management is good and future business looks to be reasonably OK.

 

@kharb Sir you have given a clear cut opinion on mcx business. it is in very nascent stage of business. when it grows it can be big.