Credit Suisse Downgrades Tata Steel, JSW Steel And JSPL; Shares Drop

An employee grinds steel edges on a production line. (Photographer: Lisi Niesner/Bloomberg)

Credit Suisse Downgrades Tata Steel, JSW Steel And JSPL; Shares Drop

Credit Suisse has downgraded its longstanding positive view on the Indian steel sector as it sees multiple risks to the prices of the alloy.

That, it said, is because:

  • Impact of supply chain shock, which drove steel prices to record highs, is easing.
  • China is entering a weak demand season at a time production continues to be very strong.
  • Chinese government’s recent comments on price control of commodities, especially steel and iron ore.
  • Ex-China production run-rate is catching up, and is at only 4% below pre-Covid peak now, while demand is at pre-Covid peak. Supplier delivery times in April have also eased from March.

Besides, Indian steel production and demand, which had started normalising towards the end of 2020, was again impacted as the second Covid-19 wave led to multiple states imposing lockdowns, according to Credit Suisse’s report—co-authored by research analysts Neelkanth Mishra, Prateek Singh and Abhay Khaitan. And Indian steel mills, the report said, have not been able to hike prices aggressively, while regional export prices moved up. That caused an 18% gap between India domestic prices and landed imports, creating room for hikes and a buffer against regional price falls.

Also read: JPMorgan Sees Liquidity Risks On Rising Non-Institutional Investor Participation

“But with emerging risks to steel prices, this buffer may not last long, limiting the scope for any price hikes. We expect both global iron ore and steel prices to weaken in second half of 2021. September quarter is a seasonally weak period for Indian steel prices as well.”

Domestic iron ore prices, according to the research firm, however, are not likely to correct as much due to sustained higher exports and an increased cost base for miners including NMDC Ltd. Steel mills with access to low-cost ore (Tata Steel Ltd. and Steel Authority of India Ltd.) would benefit relatively, it said.

In an elevated iron ore environment, Indian steel players outperform global peers. But with steel names trading at a decadal high relative price/book value and the near-term risks to steel prices, we advise caution and to book profits as well. The risk-reward for the steel sector is turning unfavourable.
Credit Suisse Report

Accordingly, the research firm downgraded its ratings for Jindal Steel & Power Ltd., JSW Steel Ltd., and Tata Steel.

  • Downgrades Tata Steel to ‘neutral’ from ‘outperform’ with a revised target price of Rs 1,250 against Rs 630, indicating a potential upside of 13%.
  • Downgrades Jindal Steel & Power to ‘neutral’ from ‘outperform’ with a revised target price of Rs 450 against Rs 250, indicating a potential upside of 10%.
  • Downgrades JSW Steel to ‘underperform’ from ‘neutral’ with a revised target price of Rs 550 compared with Rs 300 apiece, indicating a potential downside of 20%.
  • Maintains ‘neutral’ rating on SAIL but raises target price to Rs 140 from Rs 43 apiece.

Also read: India Stock Return Prospects To Improve In Second Half, Says Morgan Stanley

Credit Suisse, on the other hand, said a sharp sequential improvement in global steel demand in second half of calendar year 2021, China cutting steel production materially, or supply-side outages in iron ore driving steel prices higher are key risks to its call.

Metal stocks have witnessed a stellar rally this year as steel prices, according to the report, rose to “astronomical levels” in 2021, especially in the U.S. and Europe. In India too, the Nifty Metal index has risen 55% so far this year compared with a 9.2% gain in the benchmark Nifty 50 during the period. In the last eight sessions, however, the metal index has lost 3%, while Nifty has gained 2.3%.

Shares of Jindal Steel, JSW Steel and Tata Steel were trading 3.9%, 2.18% and 1.85% lower as of 2:45 p.m. on Wednesday.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.