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Global steel markets continue to witness a sharp divergence between prices in China and Rest of World (RoW). China domestic HRC price at USD901/t, up 7% from 1Q’22 end while US prices continue to remain strong at USD1,960/t, up further by 17% from 1Q’22 end. The RoW continued to grapple with supply chain problems leading to higher prices over the same period. India’s finished steel production / consumption increased by 6.3% / 0.2% YoY to 17.7mn tons / 15.9mn tons during QTD Aug’21. Exports registered a growth of 17.7% to 2.8mn tons during QTD Aug’21. Current finished steel inventory of 7.9mn tons is at multiyear low (36% lower YoY). Domestic steel majors have rolled forward prices of HRC for Sep’21. Domestic HRC price at c. INR65.5k/ton is still trading at a discount of c. INR 14k/18% on an import parity basis as compared with China export prices. Flat product prices are higher by c. INR800/ton QoQ. NMDC has reduced Iron ore prices by INR1,000/t for Sep’21 on account of sharp fall in global iron ore prices. China CFR iron ore price is at USD141/t, down 30.6% from 1Q’22 end. Coking coal prices surged to USD248/t, up by 29.5% from 1Q’22 end. We expect Indian steel players to report a margin compression QoQ vs peak 1Q margins, even as absolute EBITDA numbers may come in higher driven by higher volumes.

China’s steel export is unlikely to pick up given strict curbs on production and export rebate cut. Further, China is expected to extend steel production cuts until 15th March 2022 as per recent Govt. notice. This is expected to aid steel prices going ahead. 2H is likely to witness steeper Chinese steel production cut (July down -8% MoM) as provinces implement plan for the same while domestic India market may witness a mini restocking cycle as economic activity picks up post second wave restrictions. We recommend selective exposure - TATA (TSE to witness price gains from 2Q) in the ferrous space and HNDL (strong aluminium/Novelis outlook) in the non-ferrous space. JSP is likely to be a key beneficiary of 2H price surge in long products as construction activity picks up. A sharp fall in steel price remains key risk to our call.

* Steel exports pick up as domestic demand remains soft: India’s finished steel production increased by 6.3% YoY to 17.7mn tons for QTD Aug’21. Domestic finished steel consumption increased by 0.2% YoY to 15.9mn tons during QTD Aug’21. Current finished steel products inventory of 7.9mn tons is at multi-year low (flat MoM; 36% lower YoY). Exports registered a growth of 17.7% to 2.8mn tons during QTD Aug’21. Net exports from India stood at 2.03mn tons during QTD Aug’21. Market share of steel majors stands at 58.7% for FYTD’22 (vs. 59.0% in FYTD’21 and 58.1% in FY21) while secondary producers market share stands at 41.3% for FYTD’22 (vs. 41.0% during FYTD’21 and 41.9% in FY21). PSUs share in total steel production increased to 15.4% during FYTD’22 (vs. 12.6% in FYTD’21 and 14.5% in FY21). JSW steel reported 5% YoY (flat MoM) increase in Aug’21 crude steel production to 1.38mn tons while JSPL reported 6% YoY (+2% MoM) increase in Aug’21 crude steel production to 0.66 mn tons

* Steel companies roll forward prices in September: Domestic HRC prices continues to hold strong at c. INR65.5k/t (up c. INR500/t from 1QFY22 average prices of c. INR65k/ton) driven by higher international steel prices along with healthy global demand. Recently, primary mills have rolled forward the prices of HRC / Rebar for Sep’21. JSW Steel HRC prices were higher than other steel majors, therefore to align the prices it has reduced HRC prices by INR2k/t to c.INR66k/t. Long products (rebar) prices remained at INR44.7k/t (flat QoQ). Global steel markets continue to witness a sharp divergence between prices in China and Rest of World (RoW) over the last few month. China domestic HRC price at USD901/t, up 7% from 1Q’22 end while US prices continues to remain strong at USD1,960/t, moved up further by 17% from Jun’21 end. Europe HRC prices at USD1,357/t, declined by 2% from Jun’21 end. The RoW continued to grapple with supply chain problems leading to higher prices over the same period.

* China exports to wane ahead of production curbs: China’s crude steel production for Jul’21 declined by 8.4% YoY to 86.8mn ton. YTD CY21 production was up 8% to 649mn ton. China’s share in the global steel production reached 56% during YTD CY21 (vs. 58% in YTD CY20). Excavator sale in China is up 21.2% YoY for CYTD’21 (Jul’21) to 241k units indicating increase in the construction activity YoY. China exported 43mn ton and imported c.8.4mn ton of finished steel in YTD CY21 (till Jun’21). China steel exports declined by 12% MoM during Jul’21 to 5.7mn tons. CISA predicts steel demand in China during CY21 to rise amid the steady development of economy. Steel exports unlikely to pick up while imports to increase due to strict control on production on account of environmental issues and export rebate cut. Further, China is expected to extend steel production cuts until 15th March 2022 as per the media reports (Link). This is expected to aid steel prices going ahead.

* 2H likely to witness higher chinese steel production cut; prefer TATA / HNDL:Domestic HRC price at c. INR65k/ton is still trading at a discount of c. INR 14k/18% on an import parity basis as compared with China export prices. The discount is lower at c. INR 8k/11% if we consider zero import duty. The discount w.r.t. FTA countries remain at 13%. JPC reported a steel production and consumption increase of 6.3% / 0.2% YoY during QTDAug’21 while steel export reported growth of 17.7% YoY during QTD Aug’21. On the raw material side, NMDC has reduced Iron ore prices by INR1,000/t for Sep’21 on account of sharp fall in global iron ore prices. China CFR iron ore price are at USD141/t, down 30.6% from Jun’21 end while Coaking coal prices are at USD248/t, up 29.5% from Jun’21 end. This is expected to keep steel spreads under check. China export price (relevant for India) continue to remain high at USD975/t (up 3.4% from 1Q22 end). We expect 2H is likely to witness higher Chinese steel production cut as provinces implement plan for the same while domestic India market may witness a mini restocking cycle as restrictions are lifted. We recommend selective exposure - TATA (TSE to witness price gains from 2Q) in the ferrous space and HNDL (compounding story possible beyond near term gains) in the non-ferrous space. A sharp fall in steel price or a sharp sustained hike in coking coal price remains key risk to our call.

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