Metal Sector Update - All time high spreads in a deep cyclical sector By ICICI Securities
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Capacity cuts in China (steel) fuelled expectations of it becoming a net importer of the metal. Yet, as data shows, higher spreads continue to incentivize higher production in Mar’21. Global recovery, fiscal stimulus, ESG driven supply cuts/cost incidence has been fuelling expectations at these sky-high spreads, ignoring the deep cyclicality of the sector.
We do expect demand destruction across the regions as prices consolidate at current levels; current signals of possible price control out of China further reinforce our view. As charts 1-4 highlight, spreads for Indian players have crossed CY09 highs – Tata Steel’s EBITDA for Q1/Q2FY09 was ~ Rs 26000/te, and expected Q1FY22E EBITDA is higher than the same.
Chart 6 highlights that current US spreads, have crossed past 70 year inflation adjusted highs by a margin. We believe, most of FY22E deleveraging is in the price. Reiterate REDUCE on Tata, JSPL, SELL on JSW Steel, and HOLD on SAIL.
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