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The decrease in Chinese inventories, coupled with expectations of stimulus, has sparked an upsurge in steel prices in China. Although coking coal price has rallied defying market expectations, it is now trading at an unsustainably high price vs historical averages. Indian steel markets witnessed a soft quarter with average prices broadly flat sequentially. Global steel making raw materials continued to rally – coking coal at US$330/t, iron ore at US$120/t driven by worker strikes and higher Chinese production respectively. Spreads of India steel players are likely to be under pressure in 3QFY24 driven by flat realizations and soaring coking coal consumption cost. Consequently, we estimate an EBITDA margin compression of INR1.5k+/ton QoQ. Volume growth is likely to be muted sequentially. Working capital requirements on account of higher coking coal prices and possibly higher steel inventory could negate any chances of net debt reduction. However, recent run up in China prices, sound bites around China stimulus, higher expected consumption in 4Q owing to general elections and recent media articles pointing towards import curb measures by ministry have led to a rally in steel names. While we are yet to see an improvement in spot spreads, any let up in coking coal price amidst price rise in China can help the rally sustain into CY24. JSPL (lowest leverage, highest volume growth over next few years) and Hindalco (Novelis delivering record margins) remain our top picks in the space.

? China price rallies on lower inventories, expected stimulus; offers stiff competition to India exports: China domestic HRC prices increased by US$30/t since October, as steel inventories declined sharply by 20% amid expectations of an impending stimulus announcement in mid-December. China Jan’24 steel futures rallied ~10% in tandem to US$570/t+. China steel exports are up 35% CYTD with current export bids at sub U$600/t – 10% lower than last offered export price from India. During the quarter, Indian mills have withdrawn export offers globally owing to stiff competition from China.

? Global steel making raw materials have defied market expectations and climbed significantly during CY23: Coking coal prices sustained at higher levels of US$330/t driven by inclement weather and impending industrial action by BHP Unions at key Queensland mines. China iron ore CFR price rallied another 10% during the quarter to hit a year high of US$122/t as Chinese steel production sustained at last year levels despite collapsing real estate market. The second half of the year is on track to register the highest steel production since 2020.

? Indian steel prices witnessed a soft quarter with HRC / Rebar broadly flat QoQ: This was largely driven by muted demand in November as depicted by the 5% MoM fall in steel consumption during the month. The domestic industry also witnessed a marginal inventory increase driven by twin effects of soft demand and higher net imports. Spreads of India steel players are likely to be under pressure in 3QFY24 driven by flat realisations and soaring coking coal consumption cost. Consequently, we estimate an EBITDA margin compression of INR1.5k+/ton QoQ. Volume growth is likely to be muted sequentially. Working capital requirements on account of higher coking coal prices and possibly higher steel inventory could negate any chances of net debt reduction.

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