In recent years, Steel sector and especially Tata Steel has been cursed by investor as it has under performed against Nifty index in the rally to 9119. All the long term investors and new investors have started liquidating TataSteel in the current rally but i feel somewhere you guys are making mistake. Surely, stock has been disappointing your portfolio but it has some global reasons rather than just comparing it with domestic Index or giving it domestic reasons.

Let me explain you with the comparative charts between crucial indices and Tata Steel.


Definition of Lines

Tata Steel: Its the closing price of Tata Steel traded on NSE

Steel Index:  Its the Weighted Market capitalization index of publicly traded steel companies on NYSE

HRC1: Hot Rod still prices

Nifty: Its closing prices of Nifty 50 Index

To get complete overview of the stock, we have considered last 7 years of comparative study

2009-2012: During this 3 years we could notice that all indices were performing according to one another and Tata Steel was outperforming Nifty throughout the rally. During this time frame steel demand was increasing around the globe and China had just started  investing in capacity expansion in early 2009-10. Post 2008 financial crisis it was believed that world economy is stable and back rising with confidence and so all the commodities were back in demand, especially in developing countries in Asia like India and Korea. But PIGS country financial trouble in Euro Zone got some goose bumps in post 2008 financial crisis recovery.

2012-2015: This were the most volatile years in recent times for Equity markets around the globe, starting with PIGS country crisis to China’s slowing economy for the first time in a decade. China by 2013 had expanded its Steel producing capacity which it had triggered in 2009-2012. But it was the bad time to achieve that. Euro zone crisis had completed dried up steel demand in Euro and Chinese slowing market had squeezed steel demand in the domestic market too. So it was completely a mess for commodities around the world and we saw prices falling for commodities to almost 10 years low because of a rare combination of Higher Capacity and Decreasing Demand which had triggered the fall around the globe. But for global Equity Markets this period was Capital Infusion years. As Euro and chinese markets were facing crisis and to some extent US too, their central banks infused alot money in markets which inflated all equity indices without any strong fundamental Back up. This led to divergence, as noticed in the graph, between tata steel and Nifty index as rally was purely backed by financial segment and not by commodity markets. All investors, including me were convinced of the rally but experienced analysts around the globe had already spotted this bubble in 2014. This Bubble busted in March last year and Equity markets so a strong profit booking of almost 25% from the pick in just less than 11 months.

Late 2015-2016: Last two months in 2015 had acted as bottoming out in commodity sector. Excess capacity in steel in China and Europe has started filling the pinch and countries have targeted to cut steel production of almost 200 mln tonne by 2017 which has started reaping fruits in steel prices in early 2016. Steel prices and many other base metals have seen strong recovery from a decades low prices. Even many countries have started imposing Anti-dumping duties for chinese steel which has been also a factor for steel prices rising around the  world. Even chinese companies have cut down utilization of capacity to 69% from the pick of 89%. 

So we could clearly notice that tata steel is more concerned and trades compared to global steel prices and steel companies world wide as it had Corus in its portfolio. Now all the factors are suggesting strong pull back in commodity markets and that has surely started showing some confidence back in Tata Steel stock in recent weeks. Now the divergence between Nifty and Tata Steel as marked with arrow has to narrow as it was back in 2009-12 but over a period of time. So if each card plays well for tata steel, then it is surely a multi-beggar for long term investors from current price of 315 but holding period should be minimum 3 years. I strongly recommend to start buying tata steel on dips from next possible trading session and have patience for ripening fruits!!!

This view is purely my view and you all should react to it after analyzing it thoroughly and consulting your own financial advisor. Hope this post was useful to you guys!!



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