Local steel stocks join the chorus, but Tata feels heat

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Local steel stocks join the chorus, but Tata feels heat

The war to acquire Corus has had a cathartic effect on the domestic steel share prices. Since early-October, when the deal surfaced, Tata Steel’s share price is down by 18%, weighed down by concerns over the impact of the acquisition on its balance-sheet, especially after CSN threw its hat into the ring.

However, a score of other steel companies have seen their share prices actually appreciate. JSW Steel’s share price is up 9%, Jindal Steel & Power is up 15.4% while Sail is up by 3%. Giving company to Tata Steel is Essar Steel and Jindal Stainless, whose share prices are down by 15% and 2%, respectively.

The direct impact of the Tata-Corus acquisition (if it happens) is difficult to fathom. However, if consolidation were to spread like fire then some of them could well find themselves involved in some M&A activity. Considering that one suitor for Corus will lose, that company will try to find some other target to acquire. And, it may well turn out to be a trend. But, that’s for later.

The other effect that valuations of steel stocks will go up, since companies will be willing to pay higher to acquire steel companies, using Corus’s valuation as a benchmark. Steel prices are higher on an Y-o-Y basis though they have come off the levels seen in the September ’06 quarter.

That’s one of the reasons why in the past few months steel stocks have not been doing as well. Most of them have come off the levels seen in mid-November. Soft international prices will keep the pressure on domestic steel prices, while on the input cost front, ore prices are not showing signs of softening. The combination of the two indicates a challenging time ahead for steel companies.