Oh My Japan ! Tsunami

On 9TH of March at 9 pm I got call from my friend, he enquired what I was doing ! watching TV I replied . I was watching NHK global channel where no one understand and most of the people never heard about the same news channel. I have been watching this Channel from past 3 years to know more about Japanese technology and the economy , there are no commercial ads on this channel and no beautiful anchors but wonderful documentaries on world economy. Exactly after 4 days this channel have became world most preferred channel and single source of information on Japan for all media networks across the globe. Thanks to unexpected and devasting earth quakes, tsunami and nuclear radiations. People around the world became panic and investors pressed selling buttons after watching devasting news clips. It was unfortunate time for Japan.My Guru DR MARC FABER have just given a buy call on Japan just a week back before the tsunami and earth quake ! one of the biggest natural disaster in the history of the world. Nikkei plummeted 15% after the calamity its quite natural for a stock market taking gigantic back step .On 19th October 1987 Nikkei was down 14% .During 1989 to 2003 Nikkei lost Nearly 30,000 points. They were in the down trend and for stock market like Nikkei it got habituated to the down tend from past 40 years. Nothing New if you know the history .As lad in stock markets this was second opportunity to me to learn more about natural calamities and its consequences after the man made credit calamity around the world in 2008. We should take a closer look at Germany and Japan neither was nearly poor after world war II . both were bombed and destroyed during second world war .Their people were educated these countries had the blue prints to create the necessary organizations and some of their institutions and infrastructure survived but both had devastated bombed out economies. By 1980 Japan emerge of super power and became the top exporter to the world .but the key problem for Japan in the past20 years has been stagnated growth and its aging population with a average age of 45 years which is constraint to spur the domestic consumption . Japan is the 3rd largest economy in the world with a GDP size of 5 trillion dollars .On per capita income basis Japan is still the second largest economy in the world and second largest exporter to USA .Still China is largest exporter to Japan .Off late Japanese investment have been significantly important in India like Maruthi, Ranbaxy , Hero Honda ,Nomura and week days back by nipper life’s investment in reliance capital. Impact of current natural calamity has been strenuous and it will impact the global sentiment in short term and increase further pressure on current account of Japan. What ever be distraction happened in last week was just below 10% of the loss when we compare with destruction happened during world war II.I am sure and confident Japanese economy will raise as phoenix. key reason was the way they handled the current crises and their execution capabilities and technology advancement but this destruction will increase the demand for steel and others commodities for rebuilding related activities . This rebuilding will be a bigger stimulus package for the living people of Japan to create demand !

If we observe from past 10 years every fund that invests in Asia pacific Region comes as conditions as Ex Japan . Japanese economy has been ignored in the past 20 years as a investment destination and Japanese founds flows have been key funders to the debt of major countries this will definitely make the global liquidity stagnant for a while. It is premature to assess the immediate impact of Japanese natural crises on Indian stocks markets and liquidity flows. But this crises will increase the importance on alternative energy resources like solar energy, wind, and tidal energy as renewable energy. As the growing threat for nuclear power energy and its consequences from the past 15 days.

I also watch Russia Today channel more and ‘‘Pray for Russia’’

Inside Steel Sector

At Wealth Mills I am dedicated to enrich the continuous flow of Investor education . Today I am going to envisage on Iron & steel sector . The dynamics of steel sector are completely different when we compare with any other sector .Steel is considered as commodity and commodities will always move in very large cycles . The nature of steel sector is cyclical this represents consumption of steel moves on long cycles means it goes up and again comes down. In the Exhibit -1 you can observe the commodity index CRB Index which tracks the major commodities and how commodities prices moves over long term. Steel is the base metal and basic raw material for manufacturing, infrastructure and construction sectors which are integral part of any economy .For a simple fact 80% of Auto sector raw material is steel. In India the per capita steel consumption I mean usage is at 38 Kgs per head which was 29 kgs in 2006. Let us analyze how steel sector works !
Steel industry is highly capital intensive industry and it requires huge amount of capital to start a steel industry approximately billions of dollars for a midsized production capacity as it requires superiors technology to enhance the profit margins .
Gestation period to start a steel mill varies minimum from 7 to 10 years from the erection to start the production. Key concerns for steel industry are raw material and environmental clearances , we can observe World’s 3rd largest steel producer POSCO from past 4 years struggling to get environmental clearances for its plant at Odisha state in India . Basic raw material for steel industry is iron ore and the procurement of same is very crucial , across the globe iron ore reserves are completely regulated and restricted by the governments, as iron ore mines considered to be national assets & reserves. These are the vital entry barriers for steel industry and helps the existing players to reduce the competition in the industry. Still Steel Industry is highly fragmented industry which means Nobody in the world controls the production capacity as market share which reduces the pricing power of the producers .Even the largest Steel tycoon Arcelor Mittal controls less than 10% of world Steel Production which produces 90.6 million tones. Where as in India the largest producer Tata steel have production capacity of 6.8 million tones per annum.
There are different Investment strategies an investor can follow while investing in stock markets , one of the foremost and primary strategy is BUY & HOLD for long term and let the investments grow . But while investor choosing steel sector and stocks for long term investments , since the nature of the sector dynamics are cyclical so the investor need to be very much vigilant on the sector developments and stock specific updates and stock prices. In Indian stock market context Steel is considered to be growth sector and consumption of steel growth is stable and consistent until unless there is massive expansion of infrastructure , industrialization and housing boom . Globally steel is marked as stable sector in terms of growth.
As production of steel is limited to set capacities profit growth is challenge to the producers and growing input costs always put pressure on profit margins .This is the crucial reason Steel stock valuation are cheap comparatively to other sectors and always available for single digit price to earnings multiple valuations . Tata steel PE ratio is always on single digit where as banking & Information technology sectors always enjoys highest price earning multiples.
I advocate & encourage every investor to well aware the basics and industry dynamics and how it will be perceived in the stock market’s eyes is very important before taking investment decisions. Don't expect multibagger returns from steel sector in normal market environment but your capital is more secured in this sector. Basing on the industry & sector dynamics steel sector large cap stocks are perfectly suitable to beginners and risk averse stock investors. At wealth mills I will endeavor my efforts to foster the Investor’s Investment Quotient.