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From JSW Steel To SAIL, Steel Stocks’ Stellar Run Disrupted By Supply Issues, Weak Demand

Why steel stocks' stellar run hit a bump.

<div class="paragraphs"><p>A worker stacks a coil of steel reinforcing bar with a forklift at a metal stock yard in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)</p></div>
A worker stacks a coil of steel reinforcing bar with a forklift at a metal stock yard in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

Steel stocks’ stellar run ended on diversion of oxygen to hospitals during the second wave of the pandemic and the onset of monsoon, a weak period of demand.

Commentary from China is also weighing on the sentiment. The world's biggest consumer of commodities is releasing metals from state stockpiles to curb prices after factory inflation in May rose to its highest in 13 years.

Global commodity prices were largely steady in June after surging on rising demand after the first wave of the pandemic. Indian steel stocks soared 111-260% from September to May.

But shares of JSW Steel Ltd., Steel Authority of India Ltd. and Jindal Steel & Power Ltd. fell 9-17% in the last two months amid local demand concerns. Tata Steel Ltd. rose nearly 5% during the period.

Weak demand from housing segment due to lack of labour mainly has impacted demand, VR Sharma, managing director at JSPL, said over the phone. He expects the demand to recover fully by August due to growing speed of vaccination and lower interest rates on home loan segment.

Still, monsoon months of June till September is a weak period as demand from construction sector wanes.

Here are the key factors that have capped the steelmakers’ rally:

Supply Issues

Crude steel production suffered in April-May over the previous months as oxygen was diverted to hospitals during the deadlier second wave of the Covid-19 pandemic. Numbers are not comparable with a year earlier as India was under a complete lockdown.

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Prices Ease

According to a Crisil Research report, the price of steel was up about 17% sequentially and about 50% year-on-year in the first quarter. But the metal has started cooling off.

Domestic hot-rolled coil prices slipped for the fifth straight week with a decline of Rs 1,000-1,500 across key markets due to subdued domestic demand and lower exports, Amit Dixit, assistant vice president-research at Edelweiss Securities, said in a July 8 report. There is parity between export and domestic prices, he said.

Volumes Fall

Tata Steel and JSPL’s sales fell in the first quarter as domestic demand declined.

For Tata Steel, share of exports rose to 16% of overall volumes compared with 11% in the preceding quarter. JSPL’s share of exports fell to 34% from 58%.

“Exports were impacted by logistical challenges posed by adverse weather conditions leading to congestion at ports,” JSPL said in a media statement. “Inventory of 1.5 lakh tonnes currently remains stuck at port, which will be shipped as soon as the logistical bottlenecks are removed.”

Spokespersons for JSW Steel, Tata Steel and SAIL declined to comment.

After the decline in the last two months, steel stocks are trading at a discount to historical average.