Korean steel major Posco's 68 per cent fall in net profit in the December quarter gives an indication of how profits are likely to be in the third quarter for Indian steel companies as well. The steel giant has forecast that its sales will drop by 12 per cent this year.

The villain of the story has been a huge rise in Chinese production, which has led to China becoming a net exporter of steel. The pressure was felt in India as well, with steel prices falling by about Rs 2000 per tonne last quarter.

However, that?s an old story, and the focus has now shifted to whether the Chinese government will be able to rationalise its steel industry.

Japan, Taiwan and Korea have already made production cuts, but China needs to do more. The Chinese government certainly intends to curb production, and its Eleventh Five Year Plan has a target of eliminating 55 million tonnes of steel-making capacity by 2010.

However, while that?s the long-term plan, at present there?s a lot of new capacity under construction. Under the circumstances, if price increases do occur, they are likely to happen only in the second half of the year.

Steel stocks have severely under-performed because of these concerns and the under-performance is likely to continue.

Auto sales

The rate of growth in domestic car sales has risen by 8.8 per cent in December 2005, well above the growth rates of -1.56 per cent in November and 3.68 per cent in October. The rebound is commendable because it comes on top of a 24.15 per cent growth in December 2004.

Growth in January last year was very low while February saw marginally negative growth, which means that the next two months should be good for the industry. But while car sales are the direct result of easy financing options, commercial vehicle sales are linked more directly to the growth in the economy.

News on that front has not been encouraging, with commercial vehicle sales falling 6 per cent in December 2005. Growth was 7 per cent in November . That's a steep fall from the 23 per cent growth rates notched up in November and December 2004.

The November slowdown

The macro data indicate that the economy slowed down in November 2005, with manufacturing growth dropping to 8.1 per cent. That's well below the 8.6 per cent growth for the entire April to November period.

Moreover, November's export performance too was terrible, with exports declining 11.5 per cent. That's in contrast to a growth of 16.1 per cent for the April to November period.

However, while there has been a slowing down in the growth of capital goods production as well, too much need not be read into it, since capital goods imports have been growing at a torrid pace, notching up a 45 per cent increase between April and October.

It's quite likely, therefore, that the November figures, especially the export numbers, are a blip, the result of the 42.6 per cent rise in exports in November 2004.

Emcee