Domestic steelmakers such as Tata Steel, JSW Steel, Steel Authority of India (SAIL), and Jindal Steel & Power (JSPL) have been gaining on the bourses in the recent past, following brokerage upgrades on account of improving fundamentals. The stocks are up 24-63 per cent since their October lows, and there could be more legs to the rally.
The Street’s confidence stems from the rising Chinese demand, which is supporting international steel prices at a time when there are expectations of trade tariff talks between the US and China succeeding. The Chinese steel demand in 2019 has also come ahead of estimates made earlier, say analysts, though demand from the rest of the world (RoW) markets
still remains muted. While steel inventories in China are low and most of its production is to be consumed within the country, the production cuts in winter to curb pollution means exports from China will remain low too.
All this is good news
for Indian steel producers, as it is helping domestic prices to improve too. India’s hot-rolled coil prices had fallen to a 34-month low in October to around Rs 34,250 a tonne and were below anti-dumping duty notified levels during 2017-18 and 2018-19. However, the fall was for a brief period and as the destocking cycle started coming to an end, domestic prices have been hiked through November and December.
The rising international prices, too, are supporting. Together, these provide domestic prices ample room to rise, as it makes imports from key countries such as South Korea, Japan, and China unattractive, say analysts.
Improving steel prices mean that profit margins, which hit a low in the July-September quarter (second quarter, or Q2) of 2019-20 (FY20), should also rebound. However, the demand recovery will be watched closely by the Street, as the same would have a bearing on volumes and margins.
India’s steel demand has likely been flat or marginally down year-to-date in the current financial year. Analysts, however, remain positive on demand recovery too. Those at Citi Research say they think India’s demand will rebound from the trough and thus, they are incorporating further upside to steel prices. Expecting global steel prices to rise on greater likelihood of lower exports from China and potential demand upside in RoW and India, Citi has upgraded Tata Steel as their top pick and JSW Steel to ‘buy’ (from ‘sell’); they are ‘neutral’ on SAIL. In the ferrous space, Tata Steel — with renewed domestic focus and integrated operations — remains the top pick of most analysts. For JSW Steel, which had seen pressure on its profitability due to soft realisations, it is not only expected to benefit from a recovery in prices and demand, but the benign raw material prices, particularly of coking coal, will act as a silver lining.
JSW depends mostly on external coal and iron ore for its requirements. Blended coking coal costs for the company had declined $10 per tonne in Q2FY20 and are expected to further decline by $25-30 per tonne in the October-December quarter, according to analysts at Antique Stock Broking. JSW Steel is also expected to benefit from the commissioning of its 5-million tonne per annum Dolvi expansion project by March 2020, leading to higher volumes.
SAIL, too, will benefit from improving realisations, but cost controls are crucial for margins to improve and the stock seeing upgrades. For JSPL, analysts remain confident of benefits accruing from expanded capacities and operational efficiencies coming from scale of operations.