Steel scrips have found reason to celebrate what with freight rates for steel being reduced in the Railway Budget announced on Wednesday.
And despite a dull market in the morning on Thursday, steel stocks took off - Sail (up 2.36% to Rs 10.85), Tisco (up 1.12% to Rs 149.35), Jindal Iron (up 2.03% to Rs 90.45), Essar Steel (up 1.72% to Rs 8.85) and Jindal Steel (up 0.63% to Rs 376.95).
The BSE Sensex, in contrast, was barely higher, at 3,265.31, up 4.83 points at 10:40 IST.
On Wednesday, Railway minister Nitish Kumar announced a cut in freight rates for iron and steel by 5.3% to Rs 74.41 (Rs 78.55). He also slashed rates for pig iron by 5.9% to Rs 66.14 (Rs 70.28). The rates indicated are for a weight of 100 kilogrammes (220 pounds) and a distance of 700 kilometers (438 miles). Before the budget, in fact, there was much speculation that freight rates for steel would be hiked.
Analysts say the cut in freight rates will garner considerable savings for steel companies. Freight costs account for nearly 11% of the total cost of production of these companies, and nearly 50% of their cargo is transported by rail. After the reduction in freight, steel companies are expected to save nearly 2.8% of total freight costs and 0.32% of the total cost of production. There would also be savings in freight on scrap and iron ore, but the savings will differ from company to company depending on the raw material mix and distance from the mines.
Apart from the cut in freight rates for steel, companies will also benefit from reduction in freight on raw materials. Analysts estimate another 0.1-0.2% savings from the reduction in freight of raw materials. However, savings here would differ depending on the company's lead distance to markets and rail-road mix.
The Indian steel sector has witnessed a turnaround over the past year following sustained demand for steel (in both domestic and international markets) coupled with a huge hike in steel prices over the last year. This month, steel majors effected a hike in flat steel prices by Rs 1,000-1,400 per tonne, the second major price hike in 2003. The market was, in fact, expecting a major price hike by flat steel producers as well.
The overall steel sector is expected to continue its commendable performance in the next fiscal year due to the rise in steel prices in domestic as well as international markets.
In the last one year, 52 companies (Steel Large, Steel Medium/Small, Steel Sponge Iron and Steel Pig Iron) added Rs 5,895.06 crore (R 58.95 billion) or 69% in market capitalisation to Rs 14,449.77 crore (Rs 144.49 billion) from Rs 8,554.71 crore (Rs 85.54 billion).
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