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Steel: Price slips further

Domestic HRC price edged down further by 1% WoW in traders’ market. Subdued domestic demand exacerbated the situation with export price from India dropping by USD17/t WoW compared to a decline of just USD5/t for other countries. Secondary rebar market, however, fared better with prices rising INR1,200–1,500/t WoW.

Upward momentum in Chinese prices however sustained owing to potential fiscal support in addition to the recently announced RRR cut. In our view, better demand environment in China coupled with lower exports is expected to benefit domestic steel players. We remain positive on the sector with Tata Steel (TP: INR1,950) and JSPL (INR575) as the preferred picks in ferrous.

Domestic HRC prices continue to decline on weak domestic demand

Domestic HRC price in traders’ market slipped a further 1% WoW to INR65,590/t mainly due to subdued domestic demand, particularly for flat products. As a result, exports price of Indian players is the lowest in the region at USD773/t – dropping USD17/t WoW – the most among regional players (USD5/t WoW on average). Besides, domestic HRC prices continue to stay at a premium to landed price of imports from South Korea/Japan, leading to concerns of a pick-up in imports. Longs prices in the secondary market fared better with rebar prices rising USD1,200– 1,500/t WoW, mainly on higher bids by Chinese importers. Going ahead, we will keep close tabs on domestic demand revival as it is the single most important driver for the ferrous sector.

Optimism builds up in China

China’s HRC/rebar prices rose further this week on hopes of stimulus measures as early as Jan-22. As a result, both finished steel consumption and production rose this week. In case of longs, demand is showing signs of revival at the start of the winter-storage season and a few mills already offering material for shipment from Feb-22 onwards. The continued dismal industrial production and credit-related data raises further hopes that Chinese authorities will take measures to stimulate growth in the near future.

Outlook: The long parched phase shows signs of ending

Domestic consumption has stayed dismal, particularly for flats. In Q3FY22, we have also seen increased pressure on domestic prices as: i) export realisation is again at a discount; and ii) demand in the southeast Asia region has remained lacklustre due to re-emergence of covid-19 cases. That said, the recent uptick in Chinese domestic prices raises hopes of a positive rub-off on the domestic market.

Among domestic ferrous stocks, we prefer Tata Steel (due to sustainably better performance of Tata Steel Europe) and JSPL (owing to longs prices faring relatively well). Maintain ‘BUY’ each on Tata Steel (TP: INR1,950; 5.5x FY23E EBITDA) and JSPL (TP: INR575; 5.5x FY23E EBITDA).

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