Edelweiss: Steel melting away

  • Historically, the correlation between Steel Index (A capitalisation weighted index of leading iron/steel companies) and EBITDA/tonne has been extremely poor. When EBITDA/tonne rose in 2004, due to jump in steel prices, there was not much movement in Steel Index.
  • Similarly, currently, EBITDA/tonne is stable, steel index has moderated quite sharply. However, this may be in anticipation of future decline in EBITDA/tonne.

EBITDA/tonne versus P/E ratio: Negative correlation overall

  • Overall correlation between P/E ratio and EBITDA/tonne has been negative (at -0.86) for the past five years. However, in the past few months, correlation has turned positive to 0.70.
  • In August 2003 to May 2005, the correlation is (-0.97), implying that despite higher earnings, stock prices corrected. Since May 2008,prices have dropped, but the P/E ratio has declined at a faster rate.

HR coil movement vs. Steel Index: Stocks have fallen more than steel prices

  • There is a moderate correlation between steel price movement and steel index with overall correlation in the last five years being 0.62. However, in the last 12 months, correlation is negative at (-0.25).
  • There has been a steep fall in Steel Index since May 2008, with not so much decline in steel prices. This could be because the moderation in stock prices is in anticipation of sharp falls in steel prices in future.

Correction in stocks is much faster than appreciation

  • Overall correlation between P/E ratio and HR coil prices is almost flat (at -0.022) for the last five years. However, in the last few months, correlation is extremely high, at 0.99. Since May 2008, steel prices have moderated, but P/E ratio has dropped at a faster rate.
  • In August 2003 to May 2005, the correlation is negative, as stock price did not move in accordance with increase in earnings.

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