Accordingly, steel prices have recovered by about 10 to 20 per cent. The HR prices (US import) which had fallen to a low of $210/tonne in December 1998 from $ 305 in October 1997 have risen to $250/tonne in May, 1999.

Similarly, the CR and wire rods prices have firmed up to $335/tonne and $230/tonne (respectively) from a low of $320 and $205 in February, 1999. In October 1997, these commodities were commanding a price of $ 430/tonne and $ 315/tonne.

The expectation is that the prices will increase further in the short term by about five to ten percent from the June 26, 1999 levels. Fundamentals in south-east Asia also gives hope that the recovery in steel prices would be sustained. But this might take time, say 18 to 24 months. We expect signals to become more definite by around October, 1999.

Prices in the domestic industry have also started recovering. Revival in domestic demand for flat product is still not clearly evident. There has been some revival in construction activity that has seen demand for longs improve. However, one would have to wait till end of monsoon to get a clearer picture. If the price recovery stays on line, the steel industry could be the turnaround story of FY2001. On account of sustained downtrend in prices, steel makers have been forced to restructure their operations.

The production cost of steel is one of the lowest in the world and a recovery can see Indian companies making big gains. The government has announced a set of measures that will boost demand and capacity utilisation of the long products. It has givenincentives for increased activity in the housing and infrastructure sectors. The leverage of the industry reduces profits in difficult times but increases upside per share in better times.

At present price levels, Essar followed by Sail are the cheapest companies avaialble. Tisco is the most expensive. Essar is not doing any more expansions and has sold divisions to release cash. A 15% increase in price realisation will make Essar profitable. A 10 per cent increase in price realisation will make Sail profitable.

The effect on Ispat is not straightforward because the company has been capitalising costs of its Dolvi plant. Tisco's profits will rise by Rs 420 crore for a 10 per cent rise in prices. Thus, basically, we are looking at a price rise of around 15 per cent. In FY2000, prices have bottomed out and we expect an increase of around 3 per cent in realisations. In FY2001, if the recovery sustains, the prices would rise by a further 7-10 per cent. Hence, by FY2001, we expect SAIL and Essar to beprofitable.

(Excerpts from the SBICaps report prepared by Pratik Agarwal, Assistant Vice President)