IGI Logo

Steel: Prices fall but respite in sight

Domestic HRC prices fell 2% WoW on average in traders’ market mainly reflecting the concerns around the precipitous dip in China. Secondary rebar prices have also corrected 4% WoW as demand has still not picked up. We expect pressure on pricesto persist as domestic prices are still at a premium to the landed price of imports from China.

Going ahead, we anticipate price support in China as profitability has slipped significantly and provinces have stepped up production curtailments. That said, a steep fall in coking coal prices remains a key risk to steel prices. We maintain our preference for Tata Steel (TP: INR1,950) and JSPL (TP: INR575) due to improving prospects of TSE and lower reliance on imported coking coal, respectively.

Domestic prices slip

Domestic steel prices fell across the board. HRC price in traders’ market fell 2% WoW on average to INR70,000/t on average. However, listed price of mills is unchanged at INR67,000-68,500/t. At the current level, landed price of imports from China is at a discount of 6% to the domestic price. However, we have still not heard of import bookings being made. Export prices have declined by 3-5% WoW in the region, following the hefty 10% WoW decline in China’s export price to USD795/t (at the lowest level since March-21). In case of Indian players, export realisation is at a discount of 11% to domestic prices for HRC, hence we expect the exports proportion to reduce, further exacerbating the pressure in traders’ market.

Key positives: Low spreads, declining inventory and production cuts

Despite a steep price dip in China, we see a silver lining from: i) raw material spread at 32nd percentile despite steel price at 90th percentile of past eight years range; ii) major steel-producing provinces such as Tangshan and Handan have intensified production curtailments; iii) declining inventories of HRC and rebar. Besides, the stated policy of government to discourage exports would lead to less disruption in the regional market. That said, we see a decline in coking coal price as a key risk to steel prices, however, it would improve spreads for Indian steel players.

Outlook: Difficult times; but few bright spots on the horizon

While the steep fall in steel price in China is a cause for concern, we see the rapid narrowing of spreads, lower possibility of a fall in coking coal prices and production cuts intensifying in major steel provinces as the key factors that could support prices.

While we expect profitability of domestic steel players to come under pressure owing to high coking coal prices, we expect Tata Steel and JSPL to perform relatively well owing to improving prospects of European operations (high contract prices and low iron ore prices) and lower reliance on imported coking coal (DRI-based operations and captive overseas coking coal mines), respectively. Maintain Tata Steel (TP: INR1,950; 5.5x FY23E EBITDA) and JSPL (TP: INR575; 5.5x FY23E EBITDA) as our preferred picks in the space.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.edelweiss.in/disclaimer

SEBI Registration No. INH000000172

Above views are of the author and not of the website kindly read disclaimer