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.
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.
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