2020 Likely To Be Better For Indian Steelmakers. But There’s A Risk.

Domestic steel prices are up 8 percent from their October low. JPMorgan expects the trend to sustain, led by restocking by dealers in anticipation of construction activity picking up in the seasonally strong March-April period.

Citi Research estimates the benchmark hot-rolled coil prices to rise to Rs 38,000 per tonne at the end of the ongoing financial year from Rs 37,000 per tonne now. Every Rs 1,000 per tonne increase in steel prices, it said, will raise operating profit of Tata Steel Ltd. and JSW Steel Ltd. by 10 percent and Steel Authority of India Ltd. by 20 percent.

Bottoming-out global prices and a rise in price of raw materials have driven steel prices higher in the last three months, VR Sharma, managing director at Jindal Steel & Power Ltd., told BloombergQuint. The steel industry, he said, looks bright till June, helped by the government’s focus on affordable housing and a proposal to increase infrastructure spending.

Still, Indian steel prices trade at a 10 percent discount to Chinese landed rates or imported price inclusive of all duties, according to Edelweiss Securities. That gives enough room to Indian steel mills to raise prices further.

Higher International Prices

Global steel prices mainly rose as China—the world’s largest producer—capped output during the winter to curb pollution.

Moreover, China’s supply additions, according to Citi Research, will end in 2020. Also, demand for steel in the world’s second-largest economy isn’t expected to decline sharply at least until the mid-decade, the brokerage said in a report. That, along with a progress on U.S.-China trade deal talks, initial Brexit deal, stabilising indicators of China and a potential for demand recovery in India and the rest of the world, are other tailwinds for the steel sector.

The Shanghai benchmark steel rebar futures prices have already risen to their highest in five months in December.

Raw Material Cost Escalation

Iron ore miners in Odisha and their state-run peer NMDC Ltd. had been raising prices of the key raw material in steelmaking fearing a supply disruption once 36 iron ore mines, whose leases are set to expire in March, are auctioned. Any delay over securing clearances was expected to lead to a shortage of 60 million tonnes of iron ore, nearly a third of India’s total domestic production.

But the government proposed an amendment to the Mines & Minerals (Development & Regulation) Act, 2015, to allow swift transfer of statutory and environment clearances to winning bidders—these will be valid for two years to ensure continuity.

While the move is aimed at keeping iron ore prices in check, some analysts still expect them to go up after the auctions.

“The winning bidder would secure these mines at a premium price, leading to higher cost of production,” said Amit Dixit, assistant vice president (research) at Edelweiss Securities. “That, in turn, would lead to higher iron ore prices for end users.”

According to Vishal Chandak, analyst at Emkay Global, issues like ownership of mines, availability of mining equipment, inventory and logistics could cause some disruption, leading to an uptick in iron ore prices.

Citi Research, however, isn’t expecting any disruption in iron ore industry in financial years ending March 2021 and March 2022 in its base-case scenario. But the brokerage may revise its assumption if the mines are leased out at a premium as that will raise the cost of production and eventually iron ore prices, it said in a report.

Yet, there’s one risk: lack of a steady demand.

India’s steel production, according to the Joint Plant Committee data, rose marginally in September-October but fell again in November. The data for December is yet to be released.

Seshagiri Rao, managing director at JSW Steel, told BloombergQuint that though there had been some uptick in September and October, the overall demand for the world (excluding China) in 2019 remained flat or declined. But he expects the government’s infrastructure push to drive demand in 2020.

JSPL termed the third quarter as the “most challenging” with the core sector output contracting for the fourth straight month and steel output contracting 3.7 percent in November. Still, the company managed to post a 30 percent growth during the period, it said in its quarterly update.

SAIL’s sales, too, rose nearly 36 percent and 47 percent year-on-year in November and December 2019, respectively. That, according to Citi Research, indicated some recovery in demand.

JPMorgan expects steel demand to be better in the financial year ending March 2021 than this fiscal as sales of automobiles—which contributes 10-12 percent of the steel demand—pick up, coupled with an increase in infrastructure spending and easing liquidity.

Analysts’ View

The steel stocks have rallied between 13 and 45 percent over the last three months.

JPMorgan said the sector has a potential to witness a consensus earnings upgrade, given better pricing. Edelweiss Securities, too, bets on the sector because of its valuations—which were beaten down in 2019 but have again started to rise.

Still, the 12-month Bloomberg consensus analyst estimates suggest a 7-17 percent potential downside for all steelmakers, barring JSPL. The optimism is yet to reflect in price targets.