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Domestic HRC prices rose by Rs150/te on an average in the week ended 12th Jul’23, the first rise in past 15 weeks on the back of reduced import pressures and roll-over of prices by major steel producers. Spot spread too expanded by a further 1% WoW owing to decline in coking coal prices – down US$3/te WoW. That said, longs continue to face seasonal weakness, hence rebar prices in both primary and secondary markets too were down during the week. In China, the government is expected to introduce ‘flat control’ policy in steel, implying that H2CY23 production is likely to drop by 58-60mnte. Hence, we expect steel exports from China to drop as well, maintaining the global market balance, supporting the prices. Consequently, we retain our positive outlook on the ferrous space. Maintain BUY on JSPL (TP: Rs750), ADD on Tata Steel (TP: Rs125) and SAIL (TP: Rs92).

* Domestic HRC prices increase slightly: Domestic HRC prices rose for the first time in last 15 weeks as major steel companies rolled over prices for Jul’23. However, our channel checks suggest that, on ground level, discounts of Rs1,000- 1,500/te are being offered. That said, import threat has been reduced considerably as traders are buying on ‘as needed’ basis in a bleak demand scenario. HRC-RM (raw material) spread was up 1% WoW as coking coal prices were down by US$3/te. In longs, however, rebar prices in both primary and secondary markets were down by Rs500-800/te. HRC-rebar differential rose to Rs3,420/te – highest since Apr’22 as we see divergent trends in demand. Regional prices (in South-East Asia and Far East) however dropped by US$5-10/te as the regional demand scenario remains grim. That said, Baosteel has raised its list prices by US$14/te while Vietnam's Formosa Ha Tinh raised its prices by US$10-15/te for Aug’23 sales. We believe this should provide support to regional prices. Indian steel companies are meanwhile concentrating on the more profitable EU markets and have raised their price offers by US$5-10/te WoW, though volumes remain subdued.

* Expected production curbs in China shore up sentiment: In China, the government is looking to introduce a ‘flat control’ policy in steel in H2CY23. This implies that, in H2CY23 daily crude steel production in China might drop to 2.6mnte/day from 2.9mnte/day currently. This is likely to result in both inventory drawdown as well as lower exports, supporting both domestic and international prices. There are already signs of production decline in China. For instance, the municipal government of Tangshan has asked 11 ‘Class A’ steel mills to reduce production by 30%, while ‘Class B’ or lower plants are required to suspend half of their sintering capacity during 1 st -31st Jul’23. At the same time, repairs will be carried out at four local blast furnaces during Jul’23, extending to other blast furnaces later. Furthermore, credit indicators and M2 supply for Jun’23 were ahead of the street’s expectations, suggesting that demand might pick up in the latter part of the year. However, we await a pick-up in downstream indicators.

* Outlook: Price increases by global steel majors and China’s production curbs bode well for the sector. Our channel checks suggest that domestic prices of HRC might be bottoming out. However, we believe export volumes from China remain the key, hence we will keep a close tab on the policy rollout in China as well as production cuts. We retain our positive view on the ferrous space with a BUY rating on JSPL (TP: Rs750). We also prefer Tata Steel (ADD; TP: Rs125) and SAIL (ADD; TP: Rs92). We have a HOLD rating on JSW Steel (TP: Rs675).

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