Three Things That May Turn The Tide For India’s Steelmakers

The domestic mills are taking a cue from the recovery in automobile production, improving demand in China and Europe, cheaper raw materials and an increase in product prices. That even propped up their stock prices from the March low.

Jindal Steel & Power Ltd. has rallied more than 104% since March 24, when the nationwide lockdown was imposed. Shares of JSW Steel Ltd., Steel Authority of India Ltd. and Tata Steel Ltd. have gained 23%, 13% and 22%, respectively, during the period.

Still, analysts don’t want to cheer just yet. Barring Jindal Steel, the average of Bloomberg consensus 12-month target prices implies a downside of 2-5% for other steelmakers.

India’s steel mills suffered as India's lockdown to contain the pandemic halted production. Slump in demand for the alloy deepened as new construction and purchases of cars and houses were delayed, causing prices to fall. Industry leader JSW Steel Ltd. reported its first loss in more than six years in the quarter ended June. Its smaller peer, Jindal Steel and Power Ltd., however, managed to report a profit. Tata Steel Ltd. and SAIL are yet to announce their quarterly results.

But with easing lockdown curbs and the government’s focus on infrastructure, the steel sector is expected to revive.

Here are the factors that may help Indian steelmakers:

Demand Uptick

China and Europe are witnessing a rise in demand for steel.

ArcelorMittal, the world’s largest steelmaker, in its June-quarter results, highlighted a sharp “V-shaped” recovery in China with plants operating at high utilisation rates, supported by its ongoing infrastructure spending and government stimulus.

In Europe, manufacturing PMI for July is in the expansion zone (above 50) for the first time since January 2019, and money supply is the highest since the global financial crisis. That, according to Edelweiss Securities, is expected to stimulate demand.

And as exports form a bulk of sales volume for Indian steelmakers, improving demand in Europe and China presented an opportunity. The discount between domestic and export steel prices, according to Edelweiss Securities, fell to 7% in July from 14% in March.

Back home, a revival in production of automobiles, which contribute 10-12% of the steel demand, is expected to help JSW Steel and Tata Steel. Flat steel products such as sheets and plates used in automobiles, domestic appliances and shipbuilding contribute 70-75% of the portfolio for the two companies.

JSW Steel, in a post-earnings conference call, said the company is reviewing prices of flat products as it negotiates contracts with automakers for the quarter ending September and beyond, given the improvement in production levels.

BofA Securities upgraded Tata Steel to ‘Buy’ from ‘Neutral’ rating on the back of a rebound in domestic spread—difference between selling price and cost—improved demand in China, and that any support from the European government will aid the company’s U.K. business.

Kaushik Chatterjee, chief financial officer at Tata Steel, after the fourth quarter results had said the company was still in discussions with the U.K. government for a billion-pound rescue package for its European unit.

Jindal Steel, with its product mix skewed toward long steel products such as rebar, rails and wire rod, among others, used in the construction sector, has been outperforming larger peers on the government’s focus on infrastructure as it eased lockdown curbs to revive the economy.

Discounted Domestic Prices

Even as domestic prices of benchmark hot-rolled coil rose 5% in July, a seasonally weak period, they still lag global rates. The domestic prices, however, are up only 2% from their May-low.

Emkay Global expects India’s steel mills to raise prices by Rs 500 at least in the next 10 days.

Still, the domestic steel prices traded at a 12% discount to Chinese landed costs, or imported price inclusive of all duties as of July-end, according to Bloomberg and Edelweiss Securities, compared with 4% in March. That’s mainly because of a steeper increase in Chinese prices than domestic, giving enough room to Indian mills to hike rates.

According to Citi Research, domestic hot-rolled coil prices have been hiked in July and August and are back at the March (pre-Covid) levels. It expects higher spreads in the quarter ending September, should the current hot-rolled coil prices sustain, and if exports come down and benefits of lower coking coal price kick in.

Better Spreads & Lower Raw Material Costs

A fall in coking coal prices and rising hot-rolled coil rates are expected to improve spreads of the domestic steel mills despite higher prices of iron ore.

Coking coal and iron ore are the key raw materials used in steel-making. While Tata Steel and SAIL are integrated steelmakers that produce their own raw material, JSW Steel has been ramping up its iron ore capacity. That will partially offset the rise in iron ore prices.

Coking coal prices, on the other hand, have dropped nearly 50% year-on-year in July, and are about 5% lower than in June.