What may have seemed to be a positive for steel stocks, China deciding to stop production of low quality steel using medium frequency induction furnaces is not going to have any impact on steel prices in India, says Independent Analyst, Rakesh Arora.
He says the the low quality steel produced from the soon to be shut medium frequency furnaces, is not exported out of China. This isn't anything new and the capacity cutting is in line with its target of cutting capacity of 150 million tonnes.
He advises holding onto metal stocks for another 2-3 months before booking profits. Due to the high prices, traders should refrain from buying fresh metal stocks at current levels.
Even if the steel supply were to be affected in Asia due to the ban on furnaces by China, the current demand conditions will not support a hike in prices, says Hongmei Li, Senior Editor, Metal and Steel News at S&P Global Platts.
Below is the verbatim transcript of Rakesh Arora’s interview to Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Sonia: What is the sense you are getting about the announcement that came in yesterday on cutting of capacity and the slightly medium term impact it would have on the Indian companies?
A: First of all, it is not a new news. China had already said they want to cut between 100-150 million tonne of steel capacity over a three year period. So, they have been going about this in 2016 also and we believe they have already cut 50-60 million tonne.
Now, coming to induction furnace steel plants, it is difficult to guess how much capacity exactly is there and what capacity utilisation it has been running because it is like a marginal producer which comes into the market when things are going well and goes off when things are bad.
So, overall, my guess would be that the total impact is going to be around 30 million tonne of steel production and that too it is largely long steel which is used in construction and this kind of steel is normally exported out of China. So, this steel is normally for local consumption.
I don’t see too much of a positive impact on steel prices globally or any change in exports of China because of closure of induction furnaces.
Anuj: The big question then, we have seen huge rally in stocks, Tata Steel, JSW Steel, Jindal Steel, there, there is momentum. What would be your call on some of these names and do you think some of these can still be bought at these prices or would you be tempted to book profits here?
A: As I have been saying on the channel that we think that demand is very well supported in the first half of 2017 and there is still little bit of rally left in some of these stocks. So, probably the guys who are holding it, can continue to hold on, but getting at these levels is a little bit risky.
The other impact of this induction furnace is that these are all based on scrap and if this capacity goes out and blast furnace is used to produce, there might be some impact on cost of iron ore and coking coal. So, to that extent, Indian companies don’t have coking coal and they can be impacted little bit on the cost side.
So, all-in-all, I would say that hold on to your metal stocks for another few months, but don’t try to get in at the top.
Sonia: You made an interesting point that the type of steel that China has cut capacity on is generally not exported, so, it would really not matter to the steel prices but where do you see the domestic steel prices head in the near term over the next say three to six months?
A: Coking coal prices have been settled at USD 100 higher than the previous settlement and that is going to flow through in the cost of most of the companies, not just Indian but global companies in the next two to three months and that is why we are seeing a price jump in the domestic market. So, we have seen around Rs 5,000-6,000 per tonne increase but that is largely a pass-through of the cost increases that has happened.
So, only integrated companies are actually going to benefit. So, integrated companies like Tata Steel, Indian operations are integrated for coking coal up to 60-70 percent or some of the companies like Jindal Steel and Power (JSPL) have steel coming out of thermal coal where prices haven’t really moved much in India.
So, those companies will benefit more than pure converters like JSW Steel. So, there will be a differentiation which will start to happen in the market given the way costs are moving.
Anuj: What is your pecking order, is Tata Steel on top, guessing by what you are saying?
A: I would say that Tata Steel is better placed as compared to JSW in this pack.
Anuj: What are your thoughts on non-ferrous names as well, there also we have seen a huge rally?
A: After the rally that we have seen in zinc which was one of the best commodities and also a little bit in aluminium, I am seeing that base metal prices are stagnating and historically stocks tend to lose the correlation in the last 15 percent move on the commodity price. So, same holds true, China is key for every commodity whether it is steel or non-ferrous.
We have visibility only till middle of June when the elections are due in China. Beyond that, there could be some consolidation, some weakness can come in as China recalibrates its policy. So, doubts will start to appear from middle of 2017, so, it is better to book profits by April, May and you can hold on till that time if you have the stock.