Mar 16, 2017 01:32 PM IST | Source:

Steel stocks rally on further output cut by China

Steel analysts expect Indian steel makers to benefit from this and exports from India to pick up in FY18.

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The outlook for steel makers appears to be improving even as demand in the domestic market remains tepid. Steel stocks rallied on Thursday on news that China was permanently cutting sub-standard steel capacity of 100 million tonnes. This would be in addition to the 30-million-tonne capacity cut China intended to undertake this year.

Steel analysts say the capacity cut by China has to be seen in the context of its declining exports, that had been flooding world markets for the last two years. Steel makers across the world have been battling cheap steel exports from China, which have hurt their profitability. Even as steel exports from China have already halved from 120 million tonnes to 60 million tonnes, the reported additional cut in steel capacity will lead to a further decline. Steel analysts expect Indian steel makers to benefit from this and exports from India to pick up in FY18.

Credit Suisse's materials analyst Trina Chen has written in a note that China's effective steel capacity is 860 MT. This is following closure of private mills of nearly 100-MT per annum capacity driven by financial loss in 2015 and 65 MT per annum enforced by China’s National Development and Reform Commission in 2016. Given the closure of existing capacity and planned cuts, China will not be able to produce more than 800 mt of steel. This should augur well for Indian steelmakers.

The improvement in global conditions is reflected in the production data from India too. India's steel production in the month of February grew nearly 13 percent to hit an all-time high of 8.8 MT, according to the Joint Plant Committee data. Consumption, however, remained tepid to grow by just 3 percent year-on-year to 7.3 MT. Production from Essar, JSW and Jindal Steel & Power has increased significantly by 5 MT (up 22 percent year-to-date) to 28 MT, according to Goutam Chakraborty of Emkay Global. Production is up for SAIL and Tata Steel, too. Tepid steel consumption in India and higher production is an indication that Indian steel makers are focusing on exports.

Shares of Tata Steel were up 3 percent, while that of JSW were up 3.77 percent and Jindal Steel Power were up 4.15 percent by mid-day.
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