Why Steelmakers Are Set To Get An Earnings Boost In Pandemic-Hit Year

Steelmakers are likely to see their earnings improve as a recovery in demand for the alloy has sent prices to a record high. Brokerages including JPMorgan and Morgan Stanley expect that to aid earnings of the steelmakers despite an increase in costs.Demand has slowly inched higher and is almost close to last year’s levels after India started easing the Covid-19 lockdown, according to monthly consumption data released by the Ministry of Steel. It was just 2% lower than a year earlier in October.That has aided the surge in steel stocks. While the shares of steelmakers started rising after the lockdown curbs were eased, the surge has been pronounced in the last two months. The stocks jumped 27-68% over the last two months, led by integrated steelmakers like Tata Steel Ltd. and Steel Authority of India Ltd. All steel stocks, except Jindal Steel and Power Ltd., are trading higher than 12-month analyst price targets. That came as prices of hot-rolled coil rose since July to trade at their highest, according to Amit Dixit, assistant vice president, research at Edelweiss Securities. Since March, the steel benchmark has recovered almost 28% to Rs 49,100 a tonne.According to Vishal Chandok, analyst at Emkay Global, the prices are rising because of:Shortage of steel supply from integrated players.Increase in export prices (hot rolled coil export price to Vietnam has climbed to $600 a tonne including cost and freight.Bunched up domestic demand from the first half coming through in anticipation of further price hikes, leading to restocking.Domestic hikes are supported by higher regional prices, driven by a sharp rise in Chinese domestic steel prices. China hot-rolled coil and rebar prices are up 10% and 11% in October and November, respectively, to $622 and $599 a tonne, according to a note from Motilal Oswal..Costlier Raw Material.Steel prices have been rising partly because of higher cost of raw materials. VR Sharma, managing director at JSPL, told BloombergQuint in an interview that higher prices of raw materials such as iron ore, pellets and billets, and depleting inventory have aided a rise in benchmark prices.Locally, NMDC Ltd. increased iron ore prices twice. Global iron ore prices surged on signs that the Chinese economy continues to pick up pace after Vale, the top miner of the steelmaking raw material, announced an output halt. Iron ore futures have rallied around 22% in the last one month, according to Bloomberg.Demand for steel is also recovering, especially from the infrastructure sector, causing the prices to rise, said Sharma. Steel demand entered a seasonally strong period of December to June. And while it’s still lower than a year earlier, contraction has narrowed..Another indicator of rising domestic consumption is lower exports. Steel exports stood 186 kilotonnes in October, the lowest in six months. .Most steel companies indicated a pick-up in demand in their September-quarter’s commentary.Tata Steel: In India, demand recovered with resumption of economic activities. While the steel demand declined 10.1% year-on-year to 23.6 million tonnes in the second quarter, consumption in August and September recovered to about 96% of FY20 monthly average.JSW Steel: Domestic demand has been improving month-on-month between May-June and June-July. The company expects a gradual improvement in demand in India and exports to moderate. Inventories have come down and domestic steel production versus India sales indicate that the exports exhausted stock and imports have gone down.JSPL: Demand has picked up, led by auto and infrastructure sectors. Demand led by government spending on infrastructure projects, especially with the pipelines, water pipelines, storage tanks, shipbuilding, railway.(Source: Analyst call transcripts and statements).Potential Earnings BoostHigher steel prices, recovering demand and a stronger commentary from companies point to better financials. JPMorgan upgraded the earnings estimates on integrated steelmakers Tata Steel, JSW Steel and SAIL as, besides rising demand and steel prices, they will be insulated from costlier iron ore because of the captive supply of the raw material. The sector also is under-owned, with foreign holding at nearly a decade low as of September end, and valuations below the mean.Morgan Stanley sees a room for earnings estimate upgrades for the steel companies if the current situation prevails in the quarter ending March. The brokerage attributed three reasons for its optimism: a tighter inventory and longer lead times show favourable supply-demand situation across markets; raw material (especially iron ore) dynamics should support higher steel prices; and Indian spreads of gap with global prices is still lower than historical average despite being at an eight-year high.The average of estimates compiled by Bloomberg suggests that the revenue of steelmakers will be higher in FY21 compared with the previous fiscal. If the forecasts hold, that will be a remarkable performance in a pandemic-ravaged year.

Why Steelmakers Are Set To Get An Earnings Boost In Pandemic-Hit Year

Steelmakers are likely to see their earnings improve as a recovery in demand for the alloy has sent prices to a record high.

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