Brokerages Expect Steel Prices To Rise In April; CLSA, Nomura Upgrade JSW Steel
Analysts from at least three research firms expect steel prices to rise in April on improving domestic demand, supply cuts as China cracks down on polluting industries, and discount to import parity.
That, coupled with a favourable risk-reward and capex plans, has prompted CLSA, Nomura and JPMorgan to raise their earnings estimates and price targets for Indian steelmakers, according to their research reports.
Steel stocks had outperformed the benchmarks in the last one year as economic activities picked up after India eased lockdown curbs. The scrips have gained between 214% and 321% during the period, with Jindal Steel & Power Ltd. rallying the most and Tata Steel Ltd. returning the least. So far in 2021, steel stocks have rallied 8-26%.
Here’s what analysts have to say about domestic steelmakers…
More Steam To The Rally
CLSA has raised its FY21-23 Ebitda estimates for steelmakers by 9-15% on better realisation. Unlike the consensus forecast of a Rs 10,000-12,000 per tonne drop in prices versus spot, the research firm doesn’t see rates going down quickly unless demand falls. But China’s plan to lower emissions by reducing production should support prices, it said in a report.
CLSA has maintained its ‘buy’ rating on Tata Steel and hiked the target price to Rs 950 apiece from Rs 860. It upgraded JSW Steel Ltd. from ‘sell’ to ‘outperform’ and raised the target price to Rs 490 from Rs 340 apiece.
Other key highlights:
Inventory trends down; domestic prices at a 10% discount to import parity. Recent channel checks indicate the likelihood of a Rs 1,500-2,000 a tonne price increase for April deliveries.
Resilient prices and consistent deleveraging likely to drive further upside in steel stocks.
The steel sector continues to look attractive; CLSA continues to prefer Tata Steel.
Deleveraging a focus for Tata Steel; while European business profitability could be a surprise.
Improvement in iron ore supply and commissioning of new capacities to aid JSW Steel.
Further Price Hikes
According to Nomura, hot-rolled coil prices are likely to rise in April 2021 on strong domestic demand, increase in export price offers from Vietnam and local steel being Rs 5,000-a-tonne cheaper than imported steel on landed cost basis. In anticipation of such a hike, trade channels have hiked prices by Rs 1,500-2,000 per tonne already, it said in a report.
Nomura has upgrade JSW Steel to ‘buy’ on improved steel pricing outlook as well as longer term benefits of cost savings capex kicking in from FY22.
Other key highlights:
A pick-up in industrial activity globally, and sectors such as auto and manufacturing driving steel demand.
China steel production levels higher in January-February 2021 versus last five-year highs.
Exports still weak but higher year-on-year due to high domestic demand.
Sees a near-term momentum in hot rolled coil prices due to a spike of Rs 1,500-2,000 a tonne in recent HRC trades in northern and western India as well as higher export offers.
Coke versus coking coal imports spreads in India at peak levels.
India HRC spreads remain elevated even after the drop from January 2021 peaks.
New Normal For Steel Sector
JPMorgan said despite the high degree of skepticism on steel profits, the new normal for earnings is higher than the last decade owing to China’s de-carbonisation efforts. Hence, investors will have to rerate the “new normal of steel earnings”, it said in a report.
It also expects steel prices to rise in April given landed rates are at Rs 60-65 k/t versus domestic prices of Rs 54k/t. “We increase our FY21-23 estimates by 10-35%, and this drives our price targets higher by about 15%.”
Other key highlights:
Tata Steel’s India story is well understood; Europe could be the big delta to earnings.
Kalinganagar plant phase 2 expansion restart would be a positive for Tata Steel.
JSW Steel should benefit from lower iron ore, Ispat expansion and lower coking coal.
SAIL’s employee cost provision is likely to limit fourth quarter.
SAIL is ideally positioned in a strong demand environment due to lower coking coal prices.
Most of the analysts tracked by Bloomberg are bullish on Indian steelmakers, with Jindal Steel & Power having the highest percentage of ‘buy’ ratings. Only JSW Steel has a negative 12-month consensus return potential.