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May 07, 2012, 04.50 PM IST | Source: Moneycontrol.com

Steel: Weak real demand weighing on prices

Prabhudas Lilladher has come out with its report on steel sector. The research firm remains negative on JSPL amid structural concerns on iron supply and expensive valuations.

Prabhudas Lilladher has come out with its report on steel sector. The research firm remains negative on JSPL amid structural concerns on iron supply and expensive valuations.

Prices softened in US and Europe; Chinese prices stable: Due to sharp surge in imports, spot steel prices in US corrected by US$5-10/tonne during the month to ~US$750/tonne. European steel prices corrected by US$15-20/tonne on account of continued sluggishness in domestic demand and increased competition in exports market. Chinese steel prices moved up marginally by US$5-10/tonne despite a seasonally strong period and beaten down prices.

Domestic HRC prices under pressure, Long prices remain firm: Our channel checks suggest strong likelihood for price cut in the range of Rs700-1,000 in HRC prices to Rs36,300-37,000k/tonne wef 1st April owing to overly sluggish demand, elevated inventory levels and increased supplies. On the contrary, re-bar prices remained firm at 42,500-43,000/tonne on the back of better demand and sharp cost escalation in unorganized sector.

Muted commentary from Posco; Nucor and US steel albeit shared positive outlook: 1) POSCO reported a 5% QoQ drop in realizations in March 2012 quarter, leading to a ~20% decline in operating income. Management highlighted that despite Q2 being a seasonally strong quarter, demand has not picked up to the extent it should have. 2) Nucor reported 3% QoQ increase in operating income on the back of 6% rise in realizations despite huge imports during the quarter. Albeit strong demand in auto, heavy machinery, energy and manufacturing sector, Nucor forecasted only a modest improvement in Q2 profitability owing to continued weakness in the construction sector 3) US steel reported EBITDA/tonne of ~US$52 in Q1 versus a loss of US$5 per tonne in Q4CY11, driven by 3% increase in realizations to US$764/tonne. Company expects stable demand environment and realizations in Q2 similar to Q1 levels.

Valuations and outlook: We continue to maintain our Underweight stance on the sector on the backdrop of unattractive valuations and weak earnings outlook amid peak-out of the restocking driven recovery. However, we continue to like Tata Steel on the back of attractive valuations, strong domestic operations and best play on integration. We remain negative on JSPL amid structural concerns on iron supply and expensive valuations. Our ‘Reduce’ rating on JSPL stands unchanged on the backdrop of valuations discomfort and elevated downside risks to earnings attributed to impasse in Utkal B1 coal mine and regulatory risks in JPL. Execution issues and expensive valuations continue to drive our Reduce rating on SAIL.

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