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We estimate the operating profits of our metals coverage universe to de-grow 15% QoQ in 2QFY25 given sharp decline in realizations, partially offset by the decline in coking coal prices. Indian steel markets witnessed a soft quarter with average prices down ~INR3-5k/t sequentially. Global steel making raw materials witnessed a decline – spot coking coal down to ~USD205/t (down sharply by USD110/t from peak), iron ore at ~USD102/t (down USD20/t from recent peak in Jan’24) driven by subdued chinese demand. Spreads of India steel players are likely to be under pressure in 2QFY25 driven by lower realizations partially offset by lower coking coal consumption cost (-USD15-30/t). Consequently, we estimate an EBITDA margin compression of ~INR1.5k+/ton QoQ. Volume growth in the seasonally weak quarter is likely to be muted. Working capital requirements is likely to offer some relief as steel / raw material prices trend down leading to better chances of net debt reduction. Spot spreads continue to hold higher currently than 2Q given the sharp correction in coking coal prices to USD189/t. JSPL (lowest leverage, highest volume growth over next few years) and Hindalco (Novelis delivering record margins) remain our top picks in the space.

* Global steel prices trend down on China demand woes: China domestic HRC prices declined by USD97/t from recent peak in Jan (USD565/t) to USD468/t driven primarily by subdued demand across real estate (-20% YoY) and automotive segments (3%/12% - ‘24/’23 YoY). Chinese rebar prices corrected USD86/t from peak to USD489/t in tandem with the broader markets. China’s steel exports witnessed growth in the recent months to 8.2mnt in Aug’24 vs. 7.3mnt in Jun’24. However, YTD Chinese steel exports reported an increase of 19%+ YoY – thereby weighing on global steel prices.

* Raw material prices sharply off peak: In tandem with cooling steel prices, coking coal prices corrected by USD30 QoQ/USD54 from 1Q to USD189/t. China iron ore CFR price declined by USD10 QoQ/USD16 from 1Q to USD88/t. Receding global iron ore prices is expected to reflect in lower NMDC prices eventually, while coking coal consumption cost relief is likely to aid spot steel margins further.

* Indian steel players likely to witness a soft quarter: Indian steel prices corrected substantially in 2Q – HRC by INR 3.2k/t and rebar by INR5k/t QoQ. NMDC announced price cut in fines for 2Q – averaging INR400/t lower QoQ. Steel companies guided for a ~USD15-30/t decline in coking coal consumption cost for 2QFY25. Spreads of Indian steel players are likely to be under pressure in 2QFY25 driven by lower realizations partially offset by lower coking coal /iron ore. Consequently, we estimate an EBITDA margin compression of ~INR1.5k+/ton QoQ. Volume growth in the seasonally weak quarter is likely to be muted. Working capital requirements is likely to offer some relief as steel / raw material prices trend down leading to better chances of net debt reduction.

* BHP commodity outlook: BHP in its latest commodity outlook anticipates a widening surplus in the iron ore market on average across CY24, with supply likely to continue to outpace demand into CY25. BHP sees a mild surplus for all seaborne steelmaking coals across CY24, but the supply of higher quality coals remains moderately tighter than the market as a whole. The conclusion of China’s crude steel plateau phase, India’s rapid steel capacity growth, new entrants in iron ore seaborne trade, uncertain operational performance in steelmaking coal, and the complexities that will come with greater efforts to decarbonise, will all have an influence on steel value chain trade flows.

* Spot spreads yet to find a new base amidst global price volatility; JSP / HNDL preferred bets: Spot spreads continue to hold higher currently than 2Q given the sharp correction in coking coal prices to USD189/t. China steel prices having corrected ~20% from recent peak has triggered a similar fall in raw material prices. JSPL (lowest leverage, highest volume growth over next few years) and Hindalco (Novelis delivering record margins) remain our top picks in the space

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