Archive for May, 2010

Food Price Index Rose 16.23%

Food price index rose 16.23 per cent in the year to May 15.

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The fuel price index climbed 12.08 per cent.

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Meanwhile, the speed of rise in food prices slackened from the previous week”s annual rise of 16.49 per cent.

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The fuel price inflation also slowed to 12.08 per cent from the previous week”s 12.33 per cent.

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The primary articles index was up 15.90 per cent, compared with the previous week”s annual reading of 16.19 per cent.

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Wholesale prices, however, eased in line with expectations to 9.59 per cent in April from a year earlier.

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This in turn provided further evidence that the RBI will hold off from raising interest rates at least until its next scheduled meeting in July.

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Earlier, Planning Commission Member Abhijit Sen stated that food inflation is likely to decrease to 4 to 5 % by November.

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This is from the current over 16 % after the arrival of Kharif (summer) crops.

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Meanwhile, he added that farm sector growth will be altered upwards to 0.2 % in 2009-10.

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This, however, is from the earlier estimate of minus 0.2 %.

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Prices have started falling from March after good Rabi arrival.

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Moreover, for some commodities such as onion and potatoes, the decline is very sharp.

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But, however, the overall prices are very high and after Kharif season, prices will commence to decline.

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He also said that it is quite possible food inflation will decline to 4-5 % by November this year.

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On the other hand, experts had predicted a decrease in food inflation with the arrival of Rabi crops in April.

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Mainly due to high prices of vegetables and fruits, food inflation carried on increasing and rose to 16.49 % for the week ended May 8.

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Prime Minister Manmohan Singh had expressed optimism that overall inflation would decline to 5-6 % by December.

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In addition, on farm sector growth, Sen said growth is expected to be 0.2 % in 2009-10.

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This is due to the upward revision in production in third advance estimate.

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In 2010-11, the farm sector growth is likely to be 5-6 % if met department forecast on monsoon comes true.

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Foodgrains production has been revised upwards to 218.19 million tonnes from 216.85 million tonnes quoted in the second advance estimate released in February.

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Wheat production is projected at a record 80.98 million tonnes in 2009-10.

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COMMODITY Weekly Commentary 24th – 28th May

Once again blood bath was witnessed in metal section with global financial markets in turmoil. This time both, gold and silver took a sign of relief after witnessing their all time highs on future bourses. Bearish signs were continuously seen in the markets when traders continued to sell the yellow metal to cover their losses in other markets. Equities continued to weaken amid fears that global economy may sink immediately after the nascent recovery from the recent recession.

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In base metal section, apart from nickel and copper all other metals settled in red zone. Some recovery was seen in later part of the week when France and Germany pledged to work together to solve the European debt crisis and support the euro. According to the World Steel Association, global crude steel production jumped by 31.8 percent year-on-year in the first four months of the year to 467.8 million tonnes.

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Energy section got hammered down as U.S. crude futures fell below $70 a barrel on fears that Europe’s sovereign debt crisis will harm economic recovery and weaken crude oil demand. Oil inventories at the key U.S. Cushing, Oklahoma crude oil hub rose by 500,000 barrels in the week to May 18 to 39.46 million barrels, according to a report from energy industry data provider Genscape released on last Thursday.

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In case of agro commodities, we can say that it was a week of recovery in most of the commodities. Expiry of May contract added more volatility in agro commodities at NCDEX. Firm sentiments in spice complex amid improved physical buying resulted in fresh buying and short covering in jeera.

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Well built fundamental further stimulated buying in pepper. Chilli took a sigh of relief, and it saw spellbound recovery in the prices after a fall of seven week. Yellow commodity turmeric fell for second consecutive week after a stellar run in past. It touched the low of 13640 (June contract) in NCDEX.

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Chana futures somehow managed to consolidate at lower levels. It saw marginal lower level buying. Talk of export in wheat gave much awaited rise in wheat futures whereas supply is still smooth in the market. Sharp upside move in maize surprised the market participants. Despite expectation of higher crop, maize prices jumped on the news of some export enquiries from South Korea. Uncertainties created a state of confusion in guar complex, as guarseed was trading in a range while guar gum was weak, which generally do not happen.

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Firm CBOT and BMD gave some support to soya counter; however, upside was limited on the expectation of normal monsoon.

PEER COMPARISON: UNCOVERS UNDERVALUED STOCKS

Peer comparison is one of the most efficient and effective methods of equity analysis used by analysts and individual investors. It has proved to be most widely used and accepted method that quickly shows which stocks may be overvalued, and which might make good additions to one’s portfolio. While there are other methods of determining when a stock is worth buying, such as discounted cash flow or technical analysis, peer comparison analysis remains a key tool for uncovering undervalued stocks.

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Relative Valuation: Relative valuation often considered as starting point in peer comparison analysis; it is a method of valuing a firm by comparing standardized valuation, such as price-earnings (P/E), price-to-book value (P/B), enterprise value / EBITDA (EV/EBITDA), or others that seems relevant to the investment decision metrics with those of similar companies. Let’s see how each company stacks up to the rest in the table 1.

Now the question comes: How should a company’s metrics compare to those of its peers? In other words, how fair is it for the company to carry a higher or lower valuation than the industry average and by how much?

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However, by simply using these metrics, assuming that all of the companies used for comparison should be valued equally, then naturally investors would avoid/sell PQR. But this simple analysis could be incorrect as each company should be valued differently according to its unique circumstances.

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And to measure the qualitative aspects of the companies, we use tools such as leverage and profitability metrics.

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Operating Performance, Leverage and Profitability Metrics: An investor should look at several metrics before making a decision on how a firm stacks up to its peers, including ROE, return on assets (ROA), gross margin, operating margin, profit margin, debt/equity ratio and others that may be relevant for a firm’s particular circumstances or industry. Lower ROE than its peers is a sign that the company may not turn capital into profits as efficiently as its competitors, and should be valued at a lower multiple than its peers.

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In addition, the expected growth rate of the companies in question is highly significant. Acompany with even slightly higher-than-average profit growth expectations may be valued at significantly higher multiples than its peers. Ultimately, expected profit growth is the main focus, but for young companies and industries, expected sales growth can be heavily weighted also, because these firms may be unprofitable for the foreseeable future.

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In the table above, we have seen that metrics vary considerably. A higher ROE, ROA, gross margin, operating margin and profit margin indicate better operational efficiency that have a positive effect on valuation. A higher debt/equity ratio indicates more risk due to higher leverage, and thus lower valuation. The most important metric, expected earnings growth, will generally have the greatest impact on valuation and, as we can see PQR with a much higher expected earnings growth than the industry average, is indeed valued higher than the rest by P/E, P/S and EV/EBITDA based on its current stock price (see Table 1).

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Spotting Undervalued Stocks: The next step is to use these metrics in conjunction with current valuation ratios. To do this, analyze the operational performance, leverage, profitability to determine which companies should carry a higher-than-average valuation and compare those predictions with current actual valuations. If the current valuation is lower and seems reasonable based on this analysis, then the security may present a buying opportunity. However, while some investors use quantitative econometric analysis to precisely predict how a stock should be valued based on its metrics, the vast majority view this process as more of an art than a science. So, additionally some qualitative factors must also be taken into account.

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Qualitative Factors

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Some companies have advantages or disadvantages relative to their peers based on factors not found in their financial statements. Management quality and corporate governance are some of the most widely focused qualitative factors. Corporate governance must be designed to ensure that shareholders’ rights are upheld. Every company depends on its managers for leadership and vision, both of which can affect the bottom line in the long run. The best companies will have a stable management team and enough depth of talent to weather the loss of one or two key managers without causing a major disruption to the firm’s operations or strategy.

Another very popular qualitative aspect is through Porter’s five forces analysis.

These five forces are:

•Threat of new entry

•Threat of substitution

•Bargaining power of suppliers

•Bargaining power of buyers

•Competition in the industry

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The interaction of these five forces can affect a firm’s long-term prospects for sustainable growth. If the current valuation is lower after taking various valuation metrics and qualitative factors into account, then the stock may be undervalued.

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Conclusion: Peer comparison analysis is one of the most useful tools for fundamental analysis of a stock. Since the data necessary to conduct the analysis is generally public and readily accessible on financial websites, it is easy for individual investors to employ this method of analysis for knowing undervalued scrips. Moreover, since it takes quantitative as well as qualitative aspects of company operations hand in hand, it leaves minimal room for risk and ambiguity to the investors.

ZONEWISE AGROMET ADVISORIES

Monsoons are needed to nourish crops and supplywater for farming communities. The quantity of monsoons in India has increased in the last 50 years. This year the much awaited South-WestMonsoon has reached the Indian territorialwaters. Below written are presented some Zonewise Agromet Advisories by taking the major crops into consideration.

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NORTH WEST INDIA [J & K, H. P., UTTARAKHAND, PUNJAB, HARYANA, DELHI, UP, RAJASTHAN]

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•Weather conditions are favourable for sowing of summer green gram and black gram in Delhi, select varieties for – Green gram– Pusa Ratna, Pantmung 1, Samrat, SML-668, Pusa Vaisakhi, Pusa Vishal, Pusa 105, PDM-11, SML-32; for Black gram – Pusa 1,AjadUrd 2,NarenderUrd-1,T-9, P.D.U.-1.

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•Harvesting of the already matured mustard is advised in Haryana, Punjab, Uttar Pradesh, Uttarakhand, Rajasthan and Delhi & Immediate threshing after drying is advised.Attack of painted bugwill bemore if crop is kept in the field for long time after harvest. Farmers are advised to plough the field deep in hot summer to destroy the various stages of pest under heat.

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EAST INDIA[ JHARKHAND, BIHAR , ORISSA ,WEST BENGAL & SIKKIM ]

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•In view of prevailing dry weather condition during last few weeks and also during next fewdays alongwith persisting high temperature, farmers are advised to apply light and frequent irrigation to the standing rabi crops in Bihar and Jharkhand.

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•As therewas excess rainfall during last twoweeks in Sikkim, farmers are advised to postpone irrigation to large cardamom, potato andmaize.

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•Due to high humidity and increased temperature in the flowering and fruiting stages, chilli may be infested with blight and die. Black depressed small black, circular spots are appeared on the skin of fruits. Two spraying any one of the fungicides like Carbendazim 50WP @ 1g or Saaf @ 2g / litre of water at 10 days intervals,when the disease symptoms are appeared.

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NORTH EAST INDIA[ARUNACHALPRADESH,NMM&T,ASSAM,MEGHALAYA]

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•Utilizing the recent pre-monsoon showers and expected rain, undertake sowing of the crops likemaize, jute,mesta and summer vegetables.

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•Fieldmust be ploughed and get ready for planting of ginger and turmeric inAssam.

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•To prevent Black Heart Disease in potatoes in Assam, it should not be stored and transit at high temperature (above 320C). The storage rooms should be well ventilated and bags should not be piled up very high.

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SOUTH INDIA[TN,AP, KERALA, KARNATAKA, LAKSHADWEEP,ANDAMAN&NICOBAR ISLANDS]

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•Light rainfall is expected in Brahmavar region; hence farmers are advised to take precautions in drying of pulse crops like green gram, black gram, cow pea and cashewnut etc.

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•Farmers in Central Dry zone of Karnataka are advised to apply irrigation to areca nut and coconut and pepper as temperature is increasing and to avoid sun scorching.

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WEST INDIA[GOA,MAHARASHTRA,GUJARAT]

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•Due to increase in temperatures summer chilli is likely to be infested by thrips & mites inMaharashtra, sprayMethyl dimeton 25 EC@15ml or Dimethoate 30 EC2 16 ml + Sulphur 80 %@20 g in 10 litreswater.

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•As dry weather prevailed during last week over the State and dry weather is likely to prevail during next fewdays, apply protective irrigation to the standing crops of Maharashtra. In view of persisting high temperature in East Vidarbha, farmers are advised to apply light and frequent irrigation to the standing crops.

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CENTRAL INDIA [M.P.,CHHATTISGARH]

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•Weather conditions are favourable for proper germination of maize to be grown for green cobs in Chattisgarh Plain zone.Hence, the farmerswho have assured irrigation facility are advised to complete the sowing of summer maize at the earliest.

(source: Indian Meteorological Department)

Weekly Update 24th – 28th May

Global markets nosedived after German financial regulator introduced a temporary ban on naked short selling and naked credit-default swaps of Euro-area government bonds to provide stability to the financial system from the excessive price movements. The move shattered the confidence among investors that the various efforts like 750 bn euro package to tackle the situation are not enough to stem the crisis.

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EU countries efforts to cut down on their deficits by reducing spending & increase in taxes may lead to contraction in the region. The situation poses a serious threat to US & World economy as it could lead to slide in world trade & economic growth.

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According to Emerging Portfolio Fund Research(EPFR), investors withdrew $12 billion from European & US equity funds in the week to May 19. In order to tighten the US finance industry regulation, the senate approved a bill to impose restriction on banks proprietary trading & to create a consumer protection agency having powers to write & enforce rule to ban abusive lending. In another development Fed raised the US growth estimates to a range of3.2% to 3.7% this year & lowered forecast for unemployment & inflation. The European crisis has not only hit hard the equity markets but also commodities as well. With the commodity prices coming down especially oil, it has somewhat reduced the inflationary pressures building up in the economies.

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RBI deputy governor Subir Gokaran said “cautious pace is the best way to go and that is the stance,” after the Global economy outlook changes in the last six weeks. One the domestic positive development for the Indian Government that happened was 3G auction. The government managed to garner close to Rs. 70,000 crore, double the amount it anticipated in the budget estimates. This extra money is likely to lift the pressure on the market borrowing and will give some extra room to the government  for the developmental purposes. For the time being the markets are expected to remain in pressure & will eye on the monsoon to gauge how Indian economy will behave in the rest of year as agriculture is the mainstay for the overall development.

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Overall trend of world stock markets is down though in the short term they are oversold and a bounce can be expected in the coming week which would be more of a relief rally. Till the European markets do not stabilize, the recovery might be short lived. One should be cautious in such markets. Nifty faces resistance between 5040-5120 levels and Sensex between 16800-17100 levels.

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Volatility in the global financial markets is expected to calm down in near term which will lead to some recovery in base metals and crude oil. European Union finance ministers pledged to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults. Bullions may continue to trade on weaker path as decline in safe haven status can keep the prices pressurized.

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Weakness in local currency has curtailed the volatility in bullions in domestic bourses to greater extent. Key economic releases like US GDP will set the course this week for base metals. Bulls may again take center stage in spices while oilseeds counter may try to find direction taking cues from CBOT and BMD. Wheat and Chana can trade in range with marginal buying.

Commodity Weekly Update

Fearing the worst, investors were heading their bets and turning to gold. Last week gold futures hit arecord high of $1,249.70 an ounce on COMEX division, a gain of nearly 20 percent since early February2010, as investors sought safety from turmoil in government bond markets and the risks of Greece’s debt crisis spreading to other countries.

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Domestic silver also kissed the crucial level of Rs.30, 000 per kg tailing the gains in international market. In base metals section, copper along with nickel and zinc slide in later part of the week as the investors continued to fret about China’s growth profile.

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Demand concerns within China, as world’s top copper consumer may try to curb inflation and cool its economy after data this week showed consumer inflation climbed to 18-month high in April. Also, gains in dollar index remain intact which capped the upside in future prices. In energy counter crude oil prices once again dragged down last week by economic concerns and rising U.S. petroleum inventories.

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The front month contract on NYMEX division had tested the lowest level since Feb. 12, 2010 and has erased more than $14 from a high of $87.15 hit on May 3, 2010, the highest in almost 19 months. Crude oil inventories at U.S. Cushing, Oklahoma hit a fresh record of 39 million barrels in the week to May 11, according to Genscape, an energy industry data provider. However natural gas witnessed some gains last week backed by short-covering after a government report showed a smaller-than-expected weekly inventory build.

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The U.S. Energy Information Administration report showed total domestic gas inventories rose 94 billion cubic feet to 2.089 trillion cubic feet for the week ended May 7.

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Most of the agro commodities caught up in the negative mood. Despite steep fall in production, guar complex surrendered its previous gain on the news of normal monsoon amid dull demand. Even spices were sideways to downwards on profit booking at higher levels, except pepper. The king of spices, pepper saw a smart recovery on raising quality issue by US for Vietnam pepper. Now Indian pepper has taken the center stage worldwide and demand has shifted towards India. Rally in turmeric appeared tired and traders preferred profit booking. Similarly, after witnessing a whopping rise in thecardamom prices last to last week, prices cooled down on profit booking.

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On the back of steady supply together with restricted supply propped up gur prices in both spot and future market. Range trading with downside bias noticed in oil seeds complex on mix fundamentals. Total vegetable oil imports in India during the April period were down 22% to 5.43 lakh tonnes on the account of ample stocks of vegetable oil at major ports. After making new contract low in recent trade chana futures were just trying to consolidate at lower levels. After a steep fall, mentha oil futures recovered marginally on short covering.

STEEL…….. INDICATOR OF ECONOMIC DEVELOPMENT

Due to most crucial necessity of steel in infrastructural and overall economic development, steel industry is often considered as an economic indicator of any country’s development. Steel seems to be heading for consolidation in the coming years as the global economic recovery is gaining momentum. In fact, China and India have reported huge rise in demand for steel with construction and auto sectors growing at a higher speed.

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Steel is not a single product. It is an alloy consisting mostly of iron, with a carbon content between 0.2% and 2.1% by weight, depending on the grade. There are currently more than 3,500 different grades of steel with many different physical, chemical, environmental properties. If the Eiffel Tower were to be rebuilt today the engineers would only need one-third of the amount of steel.

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Carbon Steel, Coated Steel (Galvanized & Color coated), billet, Electric Sheets, Flat Steel Products, Long Steel Products, slabs, Flat steel coil products(Strip) are the some of the finished steel.

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INDIAN SCENARIO

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According to the annual report 2009-10 by the Ministry of Steel, India is the fifth largest producer of steel in the world and it will become the world’s second-largest steel producer by 2012, more than doubling its capacity to 124 million tonnes (MT).

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Steel production rose 4.2 per cent to reach 60 MT in 2009-2010 and has an installed capacity of 72.76 million tones. According to the Ministry of Steel, Steel production in the 2010/11 (April-March) fiscal year is likely to be 65 million tones.

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The growth in steel consumption in any country is a positive sign for economic growth of that country. Due to improved demand from sectors like automobile, infrastructure and housing, India’s steel consumption rose 9.6 per cent to 4.14 million tonnes (MT) in April 2010. Exports continued to slide and dropped 34.8 per cent to 1.84 lakh tonnes in April, revealing the slow pace of recovery in main steel import destination–the US and the European markets.

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Some important facts

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?The domestic steel sector has attracted an investment of about US$ 238 billion.
This consists of nearly 222 MoU’s signed between the investors and state governments of Orissa, Jharkhand, Chhattisgarh and West Bengal.

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?Due to some government initiative in the budget and higher spending on infrastructure development, steel demand is likely to increase by 10 percent inthe fiscal year to March 2011. In the Union Budget 2010-11, India’s Finance Minister Pranab Mukherjee proposed to invest 1.73 trillion rupees on infrastructure sector, which will further promote the steel industry.

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Global Production and Consumption

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World production of crude steel in March 2010 rose by 31% to 120.3 million tonnes, the highest monthly total since May 2008. The total production in January to March is 342.4 million tonnes, 29% higher than the same period in 2009. This figures shows clearly that most countries are on path of rapid recovery from the recession. From January to March Chinese steel production increased by 24.5% to 158 million tonnes, Japan’s production jumped by 51% and South Korea increased by 29% .

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Current Scenario

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Steel makers in the country had increased their prices for the third time this year in April due to spiralling iron ore and coking coal prices. Iron ore prices in 2010 had almost doubled from last year’s levels to $120-160 a tonne. But the industry is hopeful that curbing exports would help reduce iron ore prices.

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Prices downgraded by around 13% in the month of April 2010, after hovering in broad range of Rs.25,130-30,150 per tonne. This is as compared to 2.06% gains in same month last year. Moreover, prices have fallen by around 4.50 percent since the year start SAIL had announced a price cut of Rs2,000 per tonne for its long products effective from 1st May 2010. However, this is not an indication of any future fall in steel prices. There is consumer resistance to further price increase but ultimately the pattern of global prices is still followed here and so we will also depend on the same.