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Chinese steel production cuts and a surprising improvement in steel demand (up 1% MoM in Aug, ’21) helped reduce steel exports MoM in Aug, ’21. Steel fared better than Aluminium; Aluminium witnessed ~ 4.5% MoM increase in exports in Aug, ’21. The demand lead indicators are still weak leaving the steel price resurrection story in H2CY21 dependent on the intensity of production cuts. Chinese steel profitability has declined further on the back of increasing coking coal prices.

Further, Chinese environment ministry has released the draft notice on FY22 heating season iron and steel production restrictions for consultations. Each day the correction in steel prices gets postponed, deleveraging adds to fair value for listed steel equities. We are more constructive on aluminium; maintain BUY on Hindalco. JSPL being a potential debt free entity in FY22E post Jindal Power divestment is our top pick in the ferrous space. We have also initiated on Jindal Stainless with a BUY (Link, dated Sept 5, ’21)

* Steel equities – MTM earnings currently pressured on account of higher coking coal prices; year end price increases not ruled out. Consensus (globally), including I-Sec, keeps factoring-in a steep drop in steel prices in H2FY22. We expect Chinese demand recovery by year-end given government announcements (Link), and Chinese production cuts, as upside risks. Despite a sharp fall in iron ore prices, Chinese steel profitability continues to trend down, which along with the possibility of production decline, puts a base to the fall in regional steel prices. Domestic (India) retail prices have been under continous pressure in line with demand weakness; yet, unless steel prices fall by 30-40% from here, that too in a limited timeframe, we believe deleveraging will keep accruing higher fair value for the steel stocks. Stainless steel converter spreads (scrap to steel) looks lot more normalised and we prefer Jindal Stainless over ferrous pack (Chart 19).

* Chinese steel demand and exports fared better vis-à-vis Aluminium in Aug, ’21. Chinese steel demand witnessed an improvement in Aug, ’21, up 1% MoM. Crude steel production declined 2% MoM, leading to a 11% MoM decline in steel exports out of China. Chinese steel profitability (Chart 18) has declined further given the continued increase in coking coal prices. As profits fail to recover, Environment ministry has released the draft notice on FY22 heating season iron and steel production restrictions for Beijing- Tianjin-Hebei and other regions (2+26) for consultation (Link). Traditional demand indicators (Chinese) are still quite weak with total social finance (TSF) declining ~ 11% YoY in Aug, ’21 (Chart 21), and the ongoing stress in the high yield developer bond market (Link). China Aluminium exports have increased 4.5% MoM (up 24% YoY in Aug, ’21).

* Imposition of antidumping duty on China’s FRP imports can help Hindalco. Indian commerce ministry’s investigation arm DGTR has recommended imposition of anti-dumping duty on flat rolled products and foil imports from China. DGTR has recommended AD of US$65 – US$449/te. While the final decision to impose is taken by finance ministry, the possible imposition is significantly positive for Hindalco and has the potential to increase consolidated EBITDA by 3-4% p.a. in our view.

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