Asian steel prices may have remained flat in the first half of CY19, but are down 8 per cent in the past three months despite a strong rally in international iron ore prices. The rising prices of key raw material such as iron ore have been unable to cushion the decline in steel prices.
What’s worse is that some analysts expect iron ore prices to ease in the coming months, and if demand does not recover by then, lower input cost could further push global steel producers to drive steel prices lower. The Asian steel spreads (difference between steel price and cost of production) have contracted sharply in recent months, driving some hopes of a cost-support rally; however, easing iron ore prices are likely to act as a drag for a substantial uptick in steel prices, say analysts at CLSA.
For now, analyst’s data suggests that Indian HRC (hot-rolled coil or flat) steel prices have corrected about 4 per cent since January but are still trading at 6 per cent premium to imported steel from FTA (free-trade agreement) countries. Hence, domestic prices could fall further unless global prices improve.
Rising imports a threat
The threat of rising steel exports from China, the world’s largest producer of the metal, also remains a cause of concern. Though demand in China has been on a rise, production is also growing in tandem and Chinese steel inventory (both flat and long steel) has inched up for the first time since the new-year holidays, say analysts at Edelweiss. This, as per analysts, means rising risk of steel exports from China to countries, especially India given domestic steel prices for various products are at premium or at best at par with international prices currently.
Higher competition for flat products
The domestic steel demand has been strong and consumption grew 6.5 per cent year-on-year till May, while imports dipped 8 per cent year-on-year to 1.1 million tonnes. However, exports have been on a decline due to demand slowdown in traditional markets
of South East Asia. Auto sales are down and inventory is building up. The declining exports and higher auto inventory may lead to higher supplies and thus competition intensifying for flat products in the country itself. The major impact thereby may be felt by export-heavy companies such as JSW Steel, say analysts.
With all this, it is not surprising that analysts are becoming cautious on stock ratings.
Edelweiss has maintained Hold (neutral) rating for JSW Steel and Tata Steel. They, however, remain positive on JSPL based on potential operating leverage benefits and immunity of long product to imports. JSPL has expanded capacities and higher share of long products in its portfolio. ICICI Securities, too, has given positive rating for JSPL.
While SAIL has also expanded capacities and significant portfolio of long products, it will need to keep its costs in check and sustain sales growth.
On valuations, analysts at CLSA say that Indian steel companies are trading at a steep premium to global peers despite much higher leverage (net debt/Ebitda). Enterprise value/Ebitda multiples of global steel companies have already seen significant correction. Hence, investors too need to remain caution on the sector.