Commodity Analysis

We remain bearish on overall steel outlook: Abhisar Jain

Maulik Madhu | Updated on January 16, 2018 Published on October 16, 2016

ABHISAR JAIN, Research Analyst – Metals & Mining at Centrum Broking

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Domestic market faces excess supply for at least the next few years



The global steel industry has witnessed much action this year — from the volatility in the Chinese steel market to regionalisation of steel prices on account of import protection measures to the sharp rise in coking coal prices. We spoke with Abhisar Jain, Research Analyst – Metals & Mining at Centrum Broking, to understand where the steel industry is headed.

Chinese steel prices were on a rally in the first half of 2016 followed by some moderation in recent times. Why? Where are global steel prices headed in 2017?

The year 2016 has been extremely volatile for steel prices.

From a low of $265 per tonne, Chinese steel export prices went up to about $470, then went back to around $330 and are right now stabilising around $380.

This has been triggered by a few factors. In the early part of 2016, there was oversupply in the steel market and steel prices were trading at their all-time low of $270.

2015 was the first year when there seems to have been a decent decline in Chinese steel consumption. Supply creation in China, on the other hand, continued unabated on hopes of urbanisation of the western side of the Chinese market.

But this did not play out as expected. This led to Chinese steel export volumes going up and prices coming down over the past few years with the situation turning extreme in early CY16.

At the same time, coking coal and iron ore prices were ruling at their lowest levels. However, despite the support on the cost front, many global steel capacities were not making money.

But certain iron ore miners were going out of business at the prevailing prices. So, there was a recovery of sorts in iron ore prices and then China also came out with some supply side reforms.

There also came in some import protection measures in various markets, namely India, the US and Europe. So, a combination of some demand recovery, supply discipline expectations from China, a bit of recovery in iron ore prices and trade remedial measures took global prices higher from the second quarter of CY16 but the pace and extent was clearly way beyond anyone’s expectations.

So, if coking coal prices were to sustain at $175-200 per tonne, I expect global steel prices to stay in the range of $350-400.

However, we remain bearish on the overall steel outlook.

What will be the key demand drivers of Indian steel consumption in 2016-17?

The long-term trend of steel consumption growth in India has been at 1-1.1 times the GDP growth rate. But over the last four years, while GDP growth has been 5-6 per cent, steel consumption has grown at only 2-3 per cent.

Construction and infrastructure comprise 55 per cent of steel consumption, automobiles 12 per cent and capital goods 8 per cent.

The auto sector (commercial and passenger vehicles) recovered in FY16 and is going all guns blazing in FY17.

There is massive pick-up in infrastructure creation in highways and railways.

On the real estate side, growth is not that apparent but there are positive triggers in terms of interest rates coming down.

The government is providing incentives for low-cost housing. There is a pick-up in capital goods and also in pipes and tubes, the latter thanks to creation of water infrastructure. So, I would say sooner rather than later, consumption growth should return to the long-term trend. But this has not played out completely so far in FY17. There might be some lag but once it comes in, then for the next 3-5 years, you could have a sustainable 8-10 per cent growth.

India’s domestic steel consumption has been picking up and imports have been coming down too. But domestic steel companies are ramping up capacity. Will this keep domestic steel prices under pressure?

India would be able to easily produce 10-15 million tonnes more in FY17 simply on the back of additional steel capacities which have been commissioned this year by Tata Steel, JSW Steel, SAIL and the latent capacity available with Essar Steel, Bhushan Steel and JSPL which came up in earlier years but was not operational until now.

But even if domestic production was to replace import demand by 5 million tonnes and we were to have another 7-8 per cent domestic consumption growth, we would still have steel demand of only 10-12 million tonnes. So, we have excess supply for at least the next few years.

Published on October 16, 2016

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