India Steelmakers Seen Gaining As China Signals More Imports; Tata Steel, JSW Steel Shares Rally

Indian steelmakers stand to gain higher prices after China tweaked its import and export levies on steel, signalling that the world’s largest consumer of the alloy is willing to import more to meet its growing requirement.

China cut import tariffs on steel to nil. And India’s neighbour removed a rebate of 13% on value-added tax it offered on exports of 146 steel items from May 1, according to Chinese Ministry of Finance. The rebate is now applicable on 28% of China's steel exports versus 98% earlier.

The reduction in rebate is higher than the industry expected. Mysteel Global, an online pricing and intelligence service, said based on recent sales contracts, steel exporters were anticipating a 400-basis-point cut 9%.

Steel stocks surged after the development. JSW Steel Ltd. shares rose as much as 9.2%, and is headed for its biggest single-day gain in a year. Tata Steel Ltd., Steel Authority of India Ltd. and Jindal Steel and Power Ltd. rose 2-6% compared with 0.40% gain in benchmark Nifty 50.

Credit Suisse suggests that export prices for Indian steelmakers have already risen in anticipation of this move and expects them to remain at elevated level. Much of the impact is priced in, it said.

JPMorgan expects domestic hot rolled coil prices to rise by more than Rs 6,000-7,000 a tonne in the next two months since there is a large gap between mill level and market price.

Kotak Institutional Securities, too, expects prices to rise.

Here’s what brokerages have to say...

JPMorgan

• China’s policy changes are driven by environmental concerns and are here to stay.

• Sharp surge in trade prices, export realisations and import prices mean companies to increase HRC prices by Rs 6,000-7,000 per tonne in May and June.

• Production, if impacted, should normalise by June.

• Sharp surge in domestic iron ore prices has pushed up costs for non-integrated steel companies.

• Both, Tata Steel and SAIL are the top picks

Credit Suisse

• Reinforces view of China’s focus to reduce exports, and that the March 2021 export print was likely a one-off.

• Market was anticipating rebate cuts over the past two months.

• Export prices already at a premium of $30/tonne versus discount of $50/tonne in February.

• Much of the $100 per tonne (13%) impact is already priced into the export prices.

• Expects export prices to remain at an elevated level.

• India domestic prices are now at a 14% discount to imports, with a lot of room for further price hikes ($140/t to nullify FTA discount).

Kotak Institutional Securities

• China is discouraging exports and reducing trade barriers on imported steel.

• Chinese government no longer wants steel producers to produce steel for the export market.

• China is open to address the domestic shortage with imports.

• Dealers expect another Rs 2,000-3,000/tonne price hike in HRC for May 2021.

• Sees the potential for a total Rs 5,000-6,000/tonne steel price hike in May-June 2021.

• Coking coal prices remain subdued and range-bound whereas iron at $195/ton is up 20% month-on-month.

• Steel margins in 4QFY21 will likely increase sharply to new record highs led by strong prices.

• Spot margins are higher by another Rs 5,000-6,000/tonne and earnings upgrades for FY2022 should continue.

• Tata Steel is the brokerage's preferred play.