Leading steel companies reported sanguine steel realisations in Q1FY23 amidst sharp corrections in spot prices, only because realisations lag by a quarter in the industry. The upcoming Q2FY23 quarter will reveal the extent of price decline domestically. Compared to a peak of ₹92,000 per tonne (hot rolled coil steel) at the end of March 2022, the current spot prices are hovering around ₹55,000 per tonne (40 per cent decline from peak). But going by the stock price decline, (15-30 per cent since April 2022 for SAIL, Tata Steel, JSW, and Jindal Steel) which appears to factor the decline so far, investors’ expectations now seem to indicate further slide in steel prices are less likely. We examine some of the factors that may support this expectation.

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Reflecting international factors

The key to international prices is driven by China, which holds 50 per cent of global demand and production. In the short term, China is experiencing weak construction demand and considering the same has directed production cuts in the region and lower exports. This reduction in global steel availability is in addition to China’s stance held over the last four years. Since 2018, China has maintained a tight leash on steel production and exports owing to environmental concerns, gradually reversing a global over-supply situation. The domestic retail prices (measured by mild long steel – WPI index) had grown by 19 per cent in CY2018, while the price index grew by a mere 1 per cent CAGR over the previous six years (2012-18). The volatility of Covid-19 and post-Covid supply constraints aside, steel prices should reflect China tempering its net exporter status, unless a new direction emerges. Even if China reverses its stance, closed steel plants will take six months to fire up and start production.

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There are signs that Europe’s energy crisis may last longer than the geopolitical turmoil currently underway. This will add to the cost of steel production from the region, which accounts for 12 per cent of global production. The higher raw material costs facing Europe or other producers should provide a backstop to the current decline in realisations as well.

International steel prices are 25 per cent above January 2020 prices after two years of highly volatile price movements. The commodity rallied 200 per cent at one point (Sept ’20-Sept ’21) and has eased off from a high of $1900 per ton (Sept ’21) to $740 per ton in Sept 2022. Domestic prices tracked similarly in the period. The Government implemented an export duty of 15 per cent in order to arrest the linkage to international shortage reflecting on domestic prices, which is being seen as only a temporary measure and can be reversed.

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Stock takeaways

A reversal of export may optically benefit Jindal Steel and JSW steel, which have a comparatively higher export portion of sales, but the real benefit will be a positive for all players. But, given the support for longer-term steel prices (China and cost environment in Europe) and higher scope for capacity expansion planned, we reiterate our hold call on Tata Steel as it is better placed amongst steel manufacturers. The higher spreads (revenue less costs per ton) of Tata Steel will also be a positive for the company if production costs normalise going forward. On valuations as well, Tata Steel is trading at a higher discount of 23 per cent to its last five-year average EV/EBITDA at 5.67 times. Peers, Jindal Steel and Power and SAIL, are trading at 7 and 18 per cent discount (EV/EBITDA) respectively, while JSW Steel is trading at a 7 per cent premium.

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