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Steel: Positive signs amid price decline

Domestic HRC prices in traders’ market declined further last week in the wake of subdued demand and threat of imports. We expect the recent weakness to have a bearing on notified prices of major steel players in Dec.-21. Regional HRC prices decreased USD15-25/t on average, largely due to seasonal factors. Secondary rebar prices, however, remained broadly stable.

We anticipate better prospects as steel prices in China have started rising again on improvement in demand from the real estate and infrastructure sectors. All in all, we maintain our positive view on the sector with Tata Steel (TP: INR1,950; 5.5x FY23E EBITDA) and JSPL (TP: INR575; 5.5x FY23E EBITDA) as the key picks in the space.

Domestic HRC price in traders’ market falls again

Domestic HRC price in traders’ market was down INR1,500/t on average, ahead of major mills declaring their notified prices for Dec-21. In the last three weeks, domestic HRC price has fallen almost INR4,000/t, slipping below the notified price of major mills for Nov-21. Compared to landed price of imports from China, domestic HRC price is still at a premium of 2%. Rebar prices in both the primary and secondary markets have been relatively stable though. Export HRC price for Indian players has also fallen a further USD15/t WoW to USD800/t. Currently, Indian export price is much lower than the Far East export price of USD900/t and competes with Chinese players.

Some signs of relief and belief in China

Despite the weakness in regional markets, we see signs of a demand pick up in China as local governments continue to sell bonds, whose proceeds would be utilised to boost the infrastructure and real estate sectors. As a result, Chinese domestic HRC and iron ore prices has risen together. Furthermore, as a result of better domestic realisation, Chinese players are withdrawing export offers. We expect lower export volume from China to maintain both regional price and market balance. That said, we will keep close tabs on further development in this regard.

Outlook:

Price outlook better Despite seasonal demand weakness, we see steel prices stabilising in China, the US and Europe. With global iron ore prices stable at USD100–105/t this week and domestic HRC prices in China rising, some relief is likely. In the US and Europe as well, prices are seen stabilising with customers expected to start restocking for Q1CY23 soon. Besides in China, producers are reducing their export allocation owing to the uptick in domestic prices, resulting in a better regional market balance.

In the domestic context, the sharp fall in coking coal price has resulted in spreads remaining resilient despite a fall in steel prices. Taking cognisance of emerging positive signs in China, we maintain our favourable stance on the sector with Tata Steel (TP: INR1,950; 5.5x FY23E EBITDA) and JSPL (TP: INR 575; 5.5x FY23E EBITDA) as our preferred picks.

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