Steel stocks are hit after demand forecast is lowered

Stocks

oi-Shoaib MD

By Shoaib Md

Published: Tuesday, September 13, 2011, 14:02 [IST]

After the Steel Ministry lowered demand forecast to 6% from 12%, that was estimated in May 2011; the share prices of steel companies reflected negative sentiments of the investors after this announcement.

Steel companies have already raised output early this year, in anticipation of an increase in demand.

According to the data released by the ministry, demand will fall by 2% for the six months ending September 30 YoY. The demand will come to around 30 million tones as slowdown furthers.

The ministry has halved its demand considering the high interest rates that has negatively impacted the sales of car and home.

Reserve bank of India (RBI) has raised key interest rates four time in this year to stump inflation. Analysts believe, that steel demand will only pick up if RBI starts loosing monetary policy or not hike interest rate any further in its meeting next week.

There is a possibility that the RBI governor D. Subbarao will hike the interest rate.

In its earlier meeting on June 26, the central bank had raised the repurchase rate by half a percentage point. It predicted that the rate of inflation in next year March will stand at 7%, a percentage point higher than his previous guidance.

VIEW: We consider that there could be a maximum hike of interest rate by 25 basis points. And lowering of interest rate will take place only when the rate of inflation has reduced substantially. So invstors shoudl stay away from steel sectro for some time. A small position, say 2% of the portfolio, in the best steel stocks like SAIL, Tata Steel, JSW etc is suggested. Though it may seem irrelevant to have much of an effect on the portfolio but it will provide the motivation to keep track of the sector and companies.

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