Feb 01, 2013, 12.52 PM IST | Source: Moneycontrol.com

Expect steel prices to remain firm over next 3-4 months

Prabhudas Lilladher has come out with its report on steel sector. The research firm maintains underweight rating on the sector on the back of underlying weak outlook on demand environment, subdued earnings profile and unattractive valuations in its report dated January 29, 2013.

Prabhudas Lilladher has come out with its report on steel sector. The research firm maintains underweight rating on the sector on the back of underlying weak outlook on demand environment, subdued earnings profile and unattractive valuations in its report dated January 29, 2013.

"In line with our expectation, domestic prices underperformed global prices with virtually no increase on the backdrop of weak demand, increased domestic supplies and highly competitive imports from Japan and Korea owing to reduced duties under CEPA. At current levels, domestic prices have bottomed-out; however, we don’t see scope for rise more than Rs500/t on the backdrop of weak demand outlook and increased domestic supplies.

Domestic HRC prices in Europe rose by ~US$30/t during January to US$654 largely on account of re-stocking. Otherwise, real demand across the markets continued to remain sluggish. Contrary to other markets, flat steel prices in US dipped by US$20/t due to delayed revival in activity post holidays. Our channel checks sounded confident on demand and expect prices to remain firm on the back of revival in re-stocking and real demand. Nucor recently announced hike of US$40/short ton in sheet prices to stimulate the market sentiments.

Steel prices further increased US$6/t in January over US$50 rise during preceding two months on the back of strong restocking activity and improved demand in auto and consumer durables sector. We expect prices to remain firm over the next 3-4 months on the back of record low inventory and seasonally strong months for demand. However, the quality of demand remains the key risk since our channel checks attribute the sharp rise to extremely speculative and aberrant factors rather than any real pick-up.

JPC’s December data suggests continued deceleration in consumption. Domestic consumption grew by a meagre 1.4% YoY in the month, with overall growth at 3.9% in Apr-Dec’2012 at 54.8mt. Our channel checks paint weak demand outlook, given subdued order bookings, tight liquidity and dearth of enquiries. Despite bottomed-out prices and higher global prices, we expect restricted price increase in the range of Rs500/t in February due to weak demand, increased domestic supplies and structural shift to elevated imports.

The current technical rally in global prices is primarily fuelled by re-stocking, similar to past 2-3 years. However, the recovery period would be elevated due to abnormal contraction in inventories. We maintain our Underweight rating on the sector on the back of underlying weak outlook on demand environment, subdued earnings profile and unattractive valuations," says Prabhudas Lilladher research report.

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