Analysts Optimistic About Steelmakers Despite Falling Alloy Prices
Domestic hot-rolled coil prices fell for 19th straight month in October, edging below Rs 35,000 a tonne first time since July 2016
A decline in benchmark steel prices threatens to further hurt profits of Indian steelmakers. Analysts, however, suggest the actual impact may not be that grave.
Domestic hot rolled coil prices fell for the nineteenth straight month in October, edging below Rs 35,000 a tonne first time since July 2016, on lack of demand and an extended monsoon. That could spell more trouble for steel companies that are expected to report their worst profit in nearly three years in the quarter ended September.
Yet, a possible revival in demand and softening raw material prices could support the industry’s margins, multiple brokerages said.
Domestic steel is more or less mirroring the fall in global prices as Shanghai steel rebar benchmark has declined 10 percent so far this year and 5.8 percent quarter to date. That comes amid signs of slowing global demand and growth cooling in China as well.
Outside China, global steel demand is expected to stall in 2019 on shrinking consumption in Europe and a slowdown in the U.S., Bloomberg reported citing outlook from the World Steel Association.
Why Analysts Are Optimistic
Even as India’s economic growth has fallen to its lowest in six years, analysts are hopeful of a revival in steel demand in India.
“One could expect prices to recover in the remaining months of the year supported by the revival of construction activities,” said Jayanta Roy, senior vice president at ICRA.
JPMorgan, in its preview for second-quarter earnings of metals companies, forecast the weakest quarter in three years. But it expects the demand to pick up from after Diwali, aiding the prices to recover 5-7 percent from current level.
JPMorgan also sees steelmakers benefiting from easing coking coal prices in the quarter ending December. And lower iron ore process because of a surplus would further aid margins.
Citi expects spreads, or the difference between steel and raw material prices, in the third quarter on lower fuel costs.
Moreover, imposition of anti-dumping duty across steel products will also help arrest the prices of steel, Prasad Koparkar, senior director at Crisil Research, said in a report.
The government has already imposed provisional anti-dumping duty on imports of coated steel products for six months starting Oct. 15.
JSW Steel Ltd., which had petitioned the government to curb imports, is expected to gain as galvanised steel products contribute 10 percent to its sales.
Upside Potential
Top steelmakers could see a potential upside of 11.7-60 percent in the next 12 months, with Jindal Steel and Power Ltd. leading the chart and Steel Authority of India at the bottom, according to Bloomberg data.