The year 2022 has been a period of major ups and downs - not only for the global equity markets but also for the global economy. With the central banks giving top priority to control inflation even at the cost of economic growth, the global economy paints a gloomy picture for the near future. Some sectors have been hit harder in the wake of impending demand slowdown.
The global steel sector is one of them. It faced a 4 percent on-year contraction in global steel production, driven by a 2 percent fall in production in China and 7 percent in the rest of the world.
Data shows that apart from China, production in other key regions, such as Europe, too declined 10 percent on-year and the US witnessed a decline of 5 percent. On the other hand, India and the Middle East witnessed a year-on-year growth of 5 percent and 7 percent, respectively.
“Although any sharp production growth is unlikely in CY23, it should be in the range of 1.5-2.0 percent with another healthy year for India and likely turnaround in Europe and North America,” said Edwin Basson, Director-General of the World Steel Association (WSA) at an event hosted by Elara Capital.
India stands to gain from the current dynamics
Basson believes that India’s steel industry is better placed than its peers in other countries and should witness strengthening of fundamentals, driven by better domestic demand, increased export opportunities, limited imports, and firming up of steel prices at healthy levels.
The fact that the exports from China have fallen considerably from the peaks of 2016, the likely closure of 150 million tonne (MT) of production capacity there will keep the exports from China in a tight range. This would result in a renewed focus on its domestic market and push back the exports.
This is where the Indian steel makers stand to gain. Even though India may not be able to replace China as the top producer and consumer of steel, its vast domestic market will provide ample scope of growth for the domestic steel makers.
Basson is of the opinion that apart from the strong support from domestic demand, the Middle East and Southeast Asia would be key targets for India’s steelmakers for exports in the next 5-7 years.
Middle East still needs catching up
The middle-east region, which is increasingly adding new capacity, still has a lot of catching up to do before it will start exporting to other regions. As per the Organization for Economic Co-operation and Development (OECD), the middle-east is likely to witness an 11 percent growth in new capacity addition by CY2025 over CY2022.
The recent earthquake in Turkey and Syria would require a lot of rebuilding and redevelopment to be done for the entire infrastructure space. This would generate additional demand for steel from these two nations and will push back timelines for the Middle East to become a net exporter by 5-7 years, providing export opportunity to the Indian players.
Demand – Supply gap
Global steel capacity stands at 2.4 billion tonnes as against a demand of 1.8 billion tonnes. Despite this demand-supply gap, experts expect the capacity addition to continue, given (1) various countries' endeavour to strengthen their steelmaking capacity to become self-sufficient in the long run, and (2) increased investment in capacity augmentation primarily towards reducing carbon emissions, given most existing capacity is producing high levels of carbon di-oxide.
Given the industry and global dynamics, and the likely growth of economy, the Indian steel industry holds a lot of promise and may ride the growth vectors at least for the next 5-7 years.
Stocks to focus
From the near-term perspective, experts are positive on players like Tata Steel and NMDC, which they suggest to accumulate at current levels.
In ferrous space ICICI Securities has Jindal Steel and Power Ltd (Target Price: Rs 750) and Shyam Metalics (TP: Rs 425) as its top key picks owing to their longs-heavy product portfolios. The brokerage is also positive on APL Apollo (TP: Rs 1,375) as it is a downstream player, and hence, is relatively insulated from adverse price movements.
The brokerage firm BOB Caps has Tata Steel with a TP of Rs 140 and JSPL with a TP of Rs 670 as its top picks from the sector.
Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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