China’s steel consumption remains strong
Steel trade data released by China suggests demand remains strong, with net steel exports declining to 10-yr lows in Sep’20. Moreover, high passenger car sales in Sep’20 confirm strong end user demand for steel in China. China’s domestic steel prices are also on the rise again post the National Holidays that ended last week. We believe strong steel demand and prices in China, if it sustains, would be beneficial for steel prices in the region as well as India
China’s Sept consumption data – strong on all counts
* China’s steel exports fell 28% YoY to 3.83mt in Sep’20 – the fifth consecutive month of decline. However, they increased by 4% MoM as steel traders sought to liquidate inventories ahead of the National Holidays in the first week of Oct. Exports also declined 26% YoY in 3QCY20 to 11.7mt.
* On the other hand, China’s steel imports surged by 160% YoY to 2.88mt in Sep’20 – a new all-time high.
* As a result, China’s net steel exports declined to 0.94mt – a new 10-year low. Declining net steel exports despite rising steel production (up 4.7% YoY over Jan–Sep’20) indicate strong steel consumption in China.
* China’s passenger car sales grew 8% YoY to 2.09m units in Sep’20 (and by 7.8% YoY in 3QCY20), indicating strong end-use demand for flat steel.
* China’s iron ore imports also surged 9% YoY to 108mt (8% MoM) in Sep’20, and inventories at ports rose 3% MoM to 104.8mt
China steel prices rise post National Holidays; inventories remain stable
* China’s domestic steel prices have recovered post the National Holidays (ended last week). This comes after a ~4% decline from the peak of Sep’20. We believe inventory restocking post the holidays has driven up steel prices in the country by ~70RMB/t or ~2% to USD581/t / USD554/t for HRC/rebar.
* China’s steel inventory (with traders in major cities) remained stable MoM at 4.03mt, but remains 23% YoY higher, largely due to massive long steel inventory. Flat steel inventory remains flattish on a YoY basis.
* Stable flat steel inventory despite lower exports is indicative of strong demand for flat steel in China. This is also evident from 8% YoY growth in passenger vehicle sales in China in Sep’20.
Prefer longs over flats; JSPL is top pick
* With strong steel demand supporting prices in China, we expect regional export prices to also remain strong, which should be beneficial for Indian steel prices.
* We prefer longs over flats in India’s Steel sector as we expect rebar prices to be strong, led by the seasonal (post-monsoon) uptick in construction activity.
* Thus, with ~70% share of long products in its portfolio and TP of INR234, JSP is our preferred pick in the sector. Over FY20–22E, we also estimate strong 10%/16% CAGR in standalone volumes/EBITDA. Coupled with the Oman divestment, this should drive a 37% fall in consolidated net debt to INR239b. Thus, net debt/EBITDA should decline to 2.7x, the lowest in India’s Steel sector.
* We also assign JSTL a Buy rating (TP of INR317), but rate Tata Steel Neutral (TP of INR381) on concerns related to its European business. We rate SAIL with Neutral (TP of INR35) as leverage remains a key concern.
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