We do not track Tata Steel, as it fails our investment quality grade. But let me share you our rationale why you should avoid investing in this stock.

China produces around 825 million tonnes of steel every year and this is expected to grow by 2.5% per anum that many analyst expect. China by itself had consumed around 720 million tonnes last year and the trend of their consumption is falling down at very fast speed. The trade department in China is seeing slowdown of average 3% per month from last nine months.

China dumped almost 50 million steel in the world market in 2013 and 70 million tonnes in 2014 and 130 million tonnes in the year 2015. This had eroded steel price from $1,200 per tonne to $250 – $275 per tonne.

The biggest consumer of steel in the world is China which consumes almost 60% of steel and the whole world around 1,200 million tonnes. Same time China manufactures almost 50% of the world steel. Let us do a bit of economics, the biggest manufacturer is not declining its production and the biggest consumer of steel is cutting its consumption by quarter. The problem is manufacturer and consumer is China!

Outside China, the next big steel maker is Arcelor Mittal. Who himself is in big trouble and raising this issue of China dumping cheap steel madly in the entire world. His companies share prices had come down from US $100 per share to mere US $10. Arcelor Mittal is expected to raise US $3.4 billion capital to keep themselves functioning and service their US$17 billion net debt next week with its 2015 earnings.

Here is the overview Tata Steel had to say which was released with its third quarter results.

Over the last year, global steel prices have declined sharply from around US$460/tonne to around US$260/t in line with the glut in supply and the sharp decline in raw material prices. Iron ore has dropped from around US$68/t to around US$40/t while coking coal has dropped from US$115/t to around US$80/t. Steel exports from countries such as China, Russia, Korea and Japan have surged to all-time highs on the back of lacklustre domestic demand, excess capacity and competitive currencies. Imports to India are now around 12 mtpa, with China being the largest exporter to India. Similarly, imports to Europe have increased to around 30mtpa million tonnes, with shipments from China surging by 57%. These unfairly priced imports are distorting the demand-supply balance in many regions, depressing domestic prices and undermining the profitability of many large steel producers.

We think this depressing sentiment will stay at least another two quarters, it can also prolong more.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise to take professional advice before going ahead with our views.