China’s Olympic Blue To Turn Things Rosier For Indian Steelmakers

Shares of India’s steelmakers have fallen in the past two months, capping a yearlong surge. That may, however, be a temporary pullback.While domestic demand is expected to stay resilient, there’s another trigger: China’s quest for blue skies at the Winter Olympics of February 2022. India’s neighbour is shutting polluting outputs to curb pollution before the games.That could squeeze supply even as global demand rebounds. For Indian steelmakers, it means higher prices and a bigger export opportunity, two factors that have aided performance during the pandemic..Even after the recent decline, shares of domestic producers of the alloy have surged at least 70-150%. That came as India’s economy came back to life after a complete freeze of April-May 2020.And fresh triggers could fuel demand more. Here's what is likely to aid steelmakers' performance:China’s Pollution Curbs Ahead Of OlympicsChinese steel production fell 8.4% over a year earlier to 86.8 million tonnes in July on annual production cuts to curb toxic emissions. Steel production also fell 7.6% month-on-month.Rebar production at 21 million tonnes was down 12.5% on an annual basis, the first decline of 2021.China’s top steel hub will join the campaign to ensure blue skies for the Beijing winter games by capping output and ordering other measures to slash pollution, Bloomberg reported.Tangshan will extend existing steel curbs to middle of March next year to improve air quality, Bloomberg reported citing Mysteel, which quoted a draft document issued by the city’s environment office. The hub accounts for 8% of the global output.Chinese supply restrictions and ex-China capital starvation have finally set stage for a steel supply shortfall, Ambit Capital said in a Aug. 20 report. Steel will likely undergo a tight supply cycle like iron ore is going through since 2019, it said.Indian steelmakers stand to benefit from not just stronger domestic growth, but also from opportunities for higher exports to Southeast Asia, as other such as China, Japan and Korea withdraw, Ambit said.Ambit Capital expects hot rolled coil conversion margins to stay in a higher, tighter range than in the past.After falling in July, Indian HRC prices bounced back in August, rising 3.4% or Rs 2,200 a tonne, according to SteelMint data..The prices are in an upward trajectory mainly driven by strong demand in retail and automotive segment, Koushik Chatterjee, executive director and chief financial officer at Tata Steel Ltd., told BloombergQuint in an interview. The prices are also rising because of higher input cost pressure, he said..Commodity Cost SpikeCoking Coal PricesAustralian coking coal prices have surged since May, extending an yearlong rally, and on-spot availability of prompt-loading cargoes remained tight.Japan, South Korea and India heavily rely on Australia for supply. That’s because China's import ban from Australia meant other supplier countries focused on the world’s second-largest economy.Coking coal prices have more than doubled in the year through August..Iron OreWhile domestic iron ore prices have been falling since May, SteelMint said prices will not drop below a certain level because:Production is slated to fall because the leases of two miners, Sarda and Essel, expire in August. If companies don't meet Mine Development and Production Agreement parameters, more mines would be surrendered with a bigger impact on output of the steel raw material. It depends on how much leeway the government gives to the offending miners.Meanwhile, iron ore futures in Singapore rose 10% in a single day on Aug. 24 as China’s central bank vowed to balance growth by maintaining money supply and social financing. The statement is significant as Chinese credit impulse, money supply and steel consumption fell sharply in July.According to Edelweiss Securities Aug. 16 report, iron ore prices globally may stay higher as the world’s four largest miners of the raw material for steel—Rio Tinto, BHP, Vale and Fortescue Metal Group—reported the weakest April-June performance in years with production of 265 million tonnes. The brokerage said the supply tightness will remain an issue which would aid iron ore producers’ pricing power.Iron Ore Price.Steady Revival In DemandIndian steel demand shrank about 14.8% quarter-on-quarter in the first quarter due to seasonality and lower consumption by industries amid the second Covid-19 wave, Tata Steel said during its first quarter analyst call.The company, however, expects Indian steel consumption to improve with waning second wave. Strong demand is being seen from the retail and automotive sectors, Chatterjee said.Global steel demand is likely to expand by 5.8% in 2021 as the economy recovers and vaccination increased across regions, the company said.JSW Steel Ltd., India’s largest steelmaker, said in its first-quarter analyst call that the demand so far has been driven by infrastructure spend or energy transition related to capex.While the second wave caused inventory to swell but demand is reviving, the company said.Good demand is seen from solar appliances and the packaging industry, and there are signs of revival in the auto sector and an uptick in residential construction, Seshagiri Rao, joint managing director as JSW Steel, said in an analyst call after the first quarter earnings..Trading Below Historical ValuationsDespite the recent surge in shares, steelmakers’ stocks still trade below five-year average. JSW Steel has the highest discount to its historical valuation.

China’s Olympic Blue To Turn Things Rosier For Indian Steelmakers

Shares of steelmakers have fallen in the past 2 months, capping a yearlong surge. That may, however, be a temporary pullback.

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