What’s in store for steel stocks?

The export duty levied on steel products (15 per cent) and iron ore (45-50 per cent) last week saw steel stocks falling steeply on Monday. Amid a strong growth in Indian steel production (25 million tonnes per annum were added in the last five years to touch 120 mtpa in FY22), the prospect of falling utilisation and prices looms ahead. This explains the sharp correction in the stocks.

Among Indian companies, SAIL, which has the maximum domestic focus, witnessed steel export contribution rising to 9 per cent in FY22 from 4.5 per cent in FY19. According to a report by Axis Securities, Jindal Steel and Power has the highest revenue mix from exports, at 35 per cent, in FY21, followed by JSW steel at 31 per cent (9MFY22) and Tata Steel at 14 per cent for FY22. But irrespective of revenue mix, domestic prices will decline because of excess domestic supply, and export margins will be under pressure for these companies. This also explains share price declines on May 23-24 when SAIL declined by 11 per cent, followed by Tata Steel (14 per cent), JSW Steel (15 per cent) and Jindal Steel by 18 per cent.

Post-Covid steel export

Steel exports grew 25 per cent in FY22, which exceeds the 18 per cent growth in domestic production during the period. Before the outbreak of the Covid-19 pandemic, export of iron and steel products stood at ₹14,765 crore during January-March 2020; a matching performance was achieved in March 2022 alone, at ₹14,500 crore. The peak, however, was in August 2021, at ₹18,300 crore. Exports (by value) grew consistently every month, averaging 77 per cent year-on-year for the 23 months up to March 2022, after recovering from the Covid-induced decline in April 2020.

Several factors contributed to the growth. China, the largest producer, accounting for more than half the world’s steel production, witnessed 10 per cent reduction in FY21-22 production and an export cap at 5 per cent, owing to environmental concerns. Among all the steel producing nations whose global market share increased as a result, India gained the most, at 80 bps, accounting for 7 per cent.

Price correction

The shortage from China and other major producers (Japan, Russia, Ukraine and South Korea) reflected in higher steel prices globally and domestically. The big stimulus provided by central banks, following the pandemic, may have also played a part in the excess demand, fuelled by excess liquidity. As slowing macro factors began to taper the price rally of steel in January 2022, the Russia-Ukraine conflict gave another impetus to prices from February 2022.

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HRC (hot rolled coil) steel price has come off from ₹92,000 per tonne at the end of March 2022, after rallying from its earlier peak of ₹85,000 in November 2021. Local prices are expected to be in the range of ₹65,000-70,000 as of May 2022, right at the start of the duty imposition. As the export-import geographic mix emerges post duty imposition, there may be a scope for further correction in domestic prices.

Coking coal imports and energy prices remain at peaks and is the primary input concern for manufacturers, with only a marginal relief from import duty cuts of 2.5 per cent in coking coal. Correction in iron ore prices, which was ongoing even before the duty imposition, may provide a marginal relief. Iron ore prices corrected 21 per cent from the previous peak in June 2021 to ₹6,000 per tonne in March 2022. An additional 20 per cent duty imposition on export of iron ore may bring further relief.

Domestic demand

With the expectation of lower domestic steel prices, which bodes well for auto, real estate, infrastructure and other sectors, the recovery of domestic demand will be the key factor to look out for. Domestic demand lagged finished steel production by 1-3 per cent in FY19-21 and increased to 7 per cent in FY22. The higher interest rates for capital purchases where steel is used and a higher inflation eroding purchasing power will continue to impact domestic demand, which is recovering post pandemic.

Lower realisations, tepid domestic demand, and weak macroeconomic outlook can impact the capex plans of steel players, who were on a large capex drive until now. For instance, JSW steel had a capex outlook of close to ₹39,000 crore for FY22-24. Such capex plans may be reviewed after the unprecedented export duty hikes. The saving grace can be the lower financial leverage of most companies now. During this market cycle, companies had deleveraged, driven by cash inflows from a positive business environment over the last two years.

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