Why Indian Steel Stocks Didn’t Rebound As Much As Global Peers

Jindal Steel and Power Ltd., which returned gains of around 56% to investors in the last one month, was the only Indian steelmaker to rise in line with global peers, according to Bloomberg data. Global steel majors led by Thyssenkrupp AG, in comparison, jumped up to 77.6% during the period.

Shares of domestic steelmakers had tumbled, tracking global markets, in February to April as the Covid-19 pandemic spread. Steel mills were hit by restrictions on movement of people and goods and demand for the alloy from key sectors—including construction and automobile—fell. But global steel stocks saw a sharper rebound than Indian counterparts.

Here’s a look at why Indian steelmakers haven’t recovered as much as their global peers.

Falling Demand

The World Steel Association expects steel demand in Asia’s third-largest economy to decline by 18% in 2020, at a time when global steel demand is projected to fall by 6%. The poor outlook stems from India’s stringent lockdown that froze all industrial activity.

The Joint Plant Committee’s India steel data for May highlighted that crude steel production improved 70% month-on-month. Yet, production is down nearly 44% year-on-year. Exports rose 200% over the previous month to 1.28 million tonnes.

Falling Prices

Prices of the alloy are falling amid muted domestic demand, with companies resorting to exports.

“The exports will continue to be higher in the initial period until demand recovers in India, which is only expected to recover in second half of the financial year,” Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel Ltd., said at a post-earnings interaction for the quarter ended March.

Rao had also said the contribution of exports to total sales in the ongoing quarter stood at more than half—higher than the 25-30% it had guided for the entire year.

Prices of Indian hot-rolled coil steel have been declining since February even as they have started inching higher in China, according to data by Edelweiss Securities and Bloomberg.

China’s Baosteel has proposed to increase prices by $40 a tonne from July on depleting inventories and increasing raw material costs.

Weak Outlook

A recovery in steel demand could take longer as outlook from key consumers—construction and automobile sectors—isn’t encouraging. Both these sectors were hit hard as the national lockdown decimated consumption.

The automobile sector was grappling with dwindling demand even prior to the outbreak.

The World Steel Association expects automotive industry’s sales to fall around 20% this year. That’s on top of the losses it sustained in the past two years. Return to pre-crisis levels will take several years due to lower income growth and remote working, but safety concerns might boost demand for passenger cars in the short term, it said.

The government had announced a post-pandemic recovery plan last month, aimed at helping the economy recover from the impact of Covid-19.

The stimulus is directed more towards construction activity—a relatively smaller driver for flat steel—and that has a lower benefit for JSW Steel and Tata Steel Ltd., CLSA said in its recent report on the steel sector. Construction demand could rise, which should help rebar more than flat steel, the report said.

Brokerages are pricing this in their targets.

JSW Steel and Tata Steel have minimal upside from their current market prices, the consensus of analysts tracked by Bloomberg shows, with SAIL Ltd. having a potential downside of more than 6.5%. Jindal Steel & Power Ltd., however, has an upside of more than 26%.

Ritesh Shah, analyst at Investec Capital Services India Pvt., said JSPL is better placed gain from the government’s efforts to aid the construction sector because of a larger long-steel product basket.

Silver Lining

Falling prices of coking coal, a weaker rupee, rising production levels and prices of Chinese HRC are positives for the domestic steel industry.

Coking coal prices declined by nearly a third month-on-month to $90 a tonne in May, following production curtailments in Japan and South Korea, and the lockdown in India.