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Last Updated : Dec 10, 2019 11:19 AM IST | Source: Moneycontrol.com

Signs of recovery and hope; are steel manufacturers finally ready to shine?

"Unless winter cuts are undermined in China, iron ore and coking coal prices are likely to trend lower, resulting in higher margins for steel players," said Edelweiss Securities.

Representative image
Representative image

The US-China trade war, sluggish global economy and a prolonged subdued demand took the sheen of steel in recent times but brokerages and experts are now seeing a glint of revival in the sector.

In a report on December 6, Edelweiss Securities said that the US-China trade war had not curbed steel trade in Asia. Besides, China’s production rate had likely peaked and the construction demand in the first half of the calendar year 2020 could even surpass the estimates.

Also, low raw material prices are helping maintain the margins in China. All these factors augur well for steel manufacturers, as a stable market balance in China is critical for them.

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"Apprehensions of China upsetting the steel applecart are overdone due to limited capacity increase (38mt) through to calendar year 2023 and steady growth in construction and infrastructure segments, which is 52 percent of demand," said Edelweiss Securities.

"Despite tepid auto sector growth in CY20, we expect growth in property construction to drive consumption.”

Edelweiss points out that iron-ore prices have stayed robust in calendar year 2019, largely led by disruptions at Vale, the world’s largest ore miner.

Furthermore, a higher profit margin of steel mills amid pollution concerns has led to the widening of discount between higher grade and lower grade ore.

"Unless winter cuts are undermined in China, iron ore and coking coal prices are likely to trend lower, resulting in higher margins for steel players," said Edelweiss Securities.

Demand still subdued in India 

In India, while prices are off the lows, but demand is still subdued. Imports are also likely to be constrained by protectionist measures. "However, exports are imperative given the surplus production, particularly for flat producers. In our view, longs producers are at a relative advantage given the low reliance on exports and threat from imports," said Edelweiss Securities.

On the domestic front, demand concerns weigh, though stocks have likely bottomed out. Edelweiss has maintained ‘buy’ on Jindal Steel and Power, ‘hold’ on Tata Steel and JSW Steel and ‘reduce’ on SAIL.

Owing to the weak domestic demand environment and surplus production, Indian players are increasingly tapping exports markets.

In the last three months, India exported steel to the extent of 1mt per month, whereas imports gradually halved to 460kt.

Brokerage firm Motilal Oswal Financial Services highlights that the metal sector has de-rated on deteriorating macros due to the trade war and weakening global economic growth. However, recently domestic steel has shown some signs of a rebound as prices have reached near anti-dumping levels (thereby providing a floor) and on anticipation of a demand recovery after the monsoon season.

As per Motilal Oswal, metals trade at 0.9 times, below its historical average P/B of 1.3 times. EV/EBITDA at 6.6 times is at a 17 percent discount to the historical average.

Subdued demand in the Indian market in the light of weak macroeconomic environment remains a concern for steel. A revival in major consumers such as auto and realty sectors is also important for the revival of the metal manufacturers. Hope of a demand revival is supporting, but brokerages point out it is too early to say that the sector is readying to shine.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.

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First Published on Dec 10, 2019 10:05 am
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