Steel prices are down but companies are on hold

Indian HRC, or Hot Rolled Coil, Prices Dropped 7,200 per tonne from near-term peak in October 2021, analysts at Nomura Financial Advisory and Securities (India) said in a report on December 20. The brokerage says that steel prices are still at a premium to the prices imported from China. This means that domestic prices may fall further.

Unsurprisingly, shares of Indian steel companies, Tata Steel Ltd., JSW Steel Ltd., Jindal Steel and Power Ltd. (JSPL) and Steel Authority of India Ltd. (SAIL), have corrected from their peak during the year. Shares of these four companies have fallen in the range of about 15-27% from their respective 52-week highs.

Low demand conditions and falling realizations in China, the largest consumer of the commodity, continue to threaten Indian steel prices.

For Indian manufacturers, weak export demand is another major concern in the near future, which could pose risks to domestic steel prices. Analysts at Nomura say India’s finished steel exports have fallen to a nine-month low. Analysts say that while exports from Europe (for India) are falling due to the exhaustion of import quotas, demand from Vietnam, a major importer of Indian HRC, is also declining.

But all is not lost. With realizations expected to remain relatively soft, a respite from the fall in prices of key raw materials. International iron ore prices have almost halved from May highs and coking coal prices are also falling.

This may reduce the margins of steel makers. Note that profits per tonne may decline after peaking in the September quarter, but they are expected to remain strong.

“Steel prices have come down from peak, but at the same time, iron ore and coal prices have recovered. Hence, margins are expected to remain more or less stable, with marginal decline in margins, said Naveen Kulkarni, Chief Investment Officer, Axis Securities Ltd. According to Kulkarni, China’s steel demand growth from the construction industry largely peaked in the first half of 2021. ,

“Moreover, the strong demand scenario due to the Covid-led stimulus in April 2020 may not happen again in 2022,” he said.

Nevertheless, ongoing projects and new public infrastructure projects will continue to support China’s steel demand through 2022-2025. Issuance of special purpose bonds is a major monitorable for infrastructure development in 2022. Here, any quick spending would pose an upside risk to steel demand and prices.

To be sure, a stable China demand outlook bodes well for Indian manufacturers, and domestic demand can be expected to rebound.

“India’s steel consumption will grow by a high-single-digit percentage through 2022, with strong demand from infrastructure and manufacturing, but weak auto demand amid a shortage of semiconductors,” Moody’s Investor Services said in its 2022 outlook.

Against this backdrop, Tata Steel is well placed to meet a large part of its raw material requirements with backward integration and ongoing expansion led by its disciplined capex approach.

Meanwhile, JSW Steel should benefit from capacity expansion and easing raw material prices. On the other hand, lower debt reduces overhang for JSPL and SAIL; And completed expansions support their volume growth.