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Steel: Domestic prices edge up

Domestic HRC price in traders’ market rose further by 3% WoW on average. Rebar prices in both secondary and primary markets rose too. Regional prices remained broadly stable; however, the CIS export price increased 2% WoW. In the last one month, HRC price has shot up 10% on average, but still remains below the landed price of imports.

That said, we note the rout in ferrous market in China, mainly on the concerns of faltering demand and Evergrande signalling that it would not be able to meet its financial liabilities. We would keep close tabs on potential policy support in China. All in all, we maintain the positive view on the sector with Tata Steel (TP: INR2,055; 5x Q3FY23E EBITDA) and JSPL (TP: INR575; 5x Q3FY23E EBITDA) as our preferred picks

Impressive uptick in domestic steel prices

Domestic steel prices have risen by 10–11% across product categories in the last one month. HRC price has risen a further 3% WoW to INR71,060/t on average in traders market. The list price of major steel producers is INR68,000-69,000/t on average. Hence, we do not rule out further price hikes in the first week of November.

Primary rebar prices have followed the uptick in secondary rebar pricesrising 11% in last one month. As a result, domestic steel prices are up INR3,000- 3,500/t QoQ. That said, this is not enough to offset the adverse impact of coking coal prices; hence, we are likely to witness raw material spreads compression in Q3FY22. However, domestic prices are still at a discount to landed price of imports. Hence, we are unlikely to see an increase in imports.

China’s ferrous crash cause for concern

Steel and iron ore prices crashed today in China possibly on the concerns of faltering demand in the residential construction segment as Evergrande group signalled that it would be unable to meet its financial liabilities. Besides, there are reports of steel mills, particularly those in Jiangsu, Guangdong and Guangxi, having gradually resumed production this month as power situation has reportedly improved. That said, we believe that policy support is imminent given the faltering macro growth parameters.

Outlook: Regional price outlook positive; China the swing factor

While regional prices are stable with Japan/Korea HRC price above USD1,000/t and China export price at USD980/t. Our checks last week indicate that CIS and European mills have been endeavouring price hikes on high energy cost despite weakness in the automotive market. In India, successive price hikes in traders’ market would ameliorate the coking coal cost increase in Q3FY22.

We are concerned about today’s crash in China’s ferrous market mainly due to demand concerns and certain sections in government seeking to curb speculation in commodities market. We await further details and developments in this regard. Based on the favourable domestic price environment, we maintain our positive view on the sector with Tata Steel (TP: INR2,055) and JSPL (TP: INR575) as preferred picks in the space (both ‘BUY’).

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