Steel cos lead metal stocks’ meltdown

Suresh P. Iyengar | | Updated on: Jun 03, 2022
rolls of steel sheet in a plant

rolls of steel sheet in a plant

No relief in sight given the high input cost and selling pressure

The slowing economy on back of rise in lending rates has taken a heavy toll on metal stocks, especially that of steel companies which have been roiled by the imposition of 15 per cent export duty.

Steel prices have already crashed by ₹6,000 a tonne so far this month to ₹64,000 on expectation of a supply glut. Prices were hovering at ₹76,000 a tonne in April.

With more fall in demand likely, steel prices are expected to touch ₹60,000 a tonne next month and drop further to ₹55,000 by mid-August. Other metal prices are also on a free fall due to weak demand globally.

Reflecting the bearish sentiment, the BSE Metal index was down 228 points to 18,116 on Friday. Jindal Steel dipped four per cent to ₹363, while Hindustan Zinc and JSW Steel were down by two per cent each to ₹300 and ₹562, respectively. Other index constituents such as Tata Steel, Vedanta, Hindalco and SAIL, too, ended in the red.

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said the decline in metal prices have impacted metal stocks but the fall in steel stock prices is highly disproportionate since the sentiments have turned negative after the imposition of export duty.

However, he added the markets have overreacted with a near 30 per cent drop in stock prices for a 10 per cent cut in steel prices. If stock prices reduce by another 5 per cent, steel stocks will turn attractive buy for the medium to long-term, said Vijayakumar.

Major roadblocks

Kunal Motishaw, Research Analyst, Reliance Securities, said the spike in coking coal prices and rise in power cost remain a near-term challenge with margin getting squeezed in the current quarter. “However, we expect some recovery once steel prices stabilise as coking coal prices have cooled off from $575 a tonne in March to $420 currently,” he added. Despite the troubled times, steel companies are not expected to delay their capital expenditure on capacity expansion. State-owned SAIL had announced a capacity expansion of 10-15 mtpa (million tonnes per annum) in two phases. It is likely to embark on 5-mtpa expansion with guided capex of ₹8,000 crore in this fiscal. Similarly, JSW Steel plans to invest ₹20,000 crore in FY23.

Kamlesh Bagmar, Deputy Head of Research, Prabhudas Lilladher, said with strong deleveraged balance sheet steel companies may not go slow on their existing capacity expansion though there is no scope for much recovery in metal prices.

Even if the global metal prices increase, it will be diluted by the export duty given the Government’s strong stand to control inflation, he added.

Published on June 03, 2022
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