P Lilladher keeps negative outlook on metal & mining space

World steel production growth continued to languish, clocking a meagre ~1% YoY growth in Apr-May’12 owing to a continued weakness in Europe and Chinese markets. A continued weak construction demand and elevated inventory levels allowed Chinese steel production to grow only ~2.8% in Apr-May’12. European economic worries continued to weigh on production with EU witnessing a ~5% decline in production in Apr-May’12. However, US sustained its outperformance recording a ~9% YoY growth in Apr-May’12.

We maintain our negative outlook on the sector as deteriorating demand environment raises downside risks to steel pricing. Despite the steep fall in stock prices, we feel the risk reward remains unfavourable for the sector. However, our constructive stance on Tata Steel continues owing to strong domestic operations, attractive valuations and bottomed-out earnings in European operations. We also like Coal India on the back of attractive valuations and strong earnings profile.

Post the supply response to higher prices in Feb-Apr’12 period, May’12 has shown a reversal in trend recording a 150 bps decline in utilization levels owing to restocking demand fizzling out and downward trajectory in prices.

Flat steel product prices have fallen sharply across the board during the quarter, with current prices near or in some cases below Oct’11 lows. The double whammy of a sharp slowdown in China and precarious market conditions in Europe severely affected prices. In North Europe and American markets, prices fell by an average of
 
US$87 and US$91 QoQ/tonne, respectively, while in China prices declined by ~US$33 per tonne.

Despite sharp correction in rupee, flat steel prices in India corrected by an average of Rs500/tonne to Rs35,500 due to weak demand and elevated inventory levels. On the contrary, long product prices remained stable during the quarter at Rs38,000/tonne.