Steel stocks still under the pump, rising iron ore prices pose threat

Sajjan Jindal-led JSW Steel, Tata Steel, Rashtriya Ispat Nigam Ltd, Jindal Steel & Power (JSPL) and state-owned Steel Authority of India (SAIL) are among the top steel producing companies in the country
News of the government recommending anti-dumping duty for aluminium and zinc-coated flat steel products has failed to lift the stock prices of steel majors. 

Tata Steel, JSW Steel, SAIL, Jindal Steel and Power (JSPL) all continued their downtrend and are trading 11-19 per cent lower since the end of April. 

The anti-dumping duty will be on products that comprise a small portion of India’s steel consumption, which only JSW Steel and Tata Steel produce (about 0.5 million tonnes or mt, say analysts). The downward pricing trend in majority of steel product prices continues with costs down 7-15 per cent since March 31, shows data from Motilal Oswal Financial Services. 

With domestic steel prices below Rs 40,000 per tonne for the first time since December 2017, the Street remains cautious on prospects of the major producers. What compounds the problem is the rise in raw material costs (iron ore), which will put pressure on profitability of steel companies, especially the non-integrated players. 

The near-term pricing outlook, too, is not encouraging, given the weak monsoon and lower demand. 

Global steel prices are under pressure on account of concerns over the trade war. China’s inventory is also rising, adding to worries on realisations as well as increasing the threat of cheap imports into India. 

China’s finished steel inventories rose for the fifth successive week, surpassing 12 mt yet again. The onset of a seasonally weak period could lead to further build-up in inventory, according to Edelweiss Securities.

Therefore, the only respite for Indian steel makers may come by the end of the monsoon season, with a pick-up in demand. Higher realisations are also necessary for taking care of cost pressures. Domestic iron ore prices are expected to rise and non-integrated players will feel more heat.   

CRISIL Research says non-integrated steel players are on course for a 300-400 basis point decline in Ebitda margins, as iron ore mining leases — accounting for 30 per cent of India’s and half of Odisha’s production —expire in March 2020. 

This shall translate into a price hike of 15-20 per cent in FY21, feels Crisil, given that fresh bidding is likely to be at some premium. 

Among steel manufacturers, while Tata Steel has captive mines, JSW Steel is more dependent on external ore. 

Analysts, however believe that JSPL’s earnings improvement will continue on account of rising production and operating leverage.

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