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MOSL: METALS-Steel price volatility to eventually seep into India; Prefer JSW Steel for superior returns-Sell on Tata Steel

METALS: Steel price volatility to eventually seep into India; Prefer JSW Steel for superior returns; Sell on Tata Steel

 

• Steel price volatility in the global markets triggered by the supply glut in China should eventually seep into the Indian steel market. Imports of HRC are about INR3,000/t cheaper than the current domestic prices.
• Focus of Chinese mills appears to be shifting from high productivity to protecting profits, and therefore, we believe that the earlier supernormal steel mill spreads are a thing of the past. Hence, we are lowering estimates for all steel companies.
• Valuations of steel stocks are getting de-rated globally, similar to events seen during 2008 i.e. before the financial crisis.
• We are downgrading Tata Steel to Sell and recommend switching to JSW Steel for superior returns.

 

Global steel price volatility to seep into Indian market despite protection:

The last two months have been witness to a price correction in the global steel markets across the world. What was initially seen as a seasonal price correction has emerged ominous with steel prices plunging in the last 2-3 weeks. China’s export HRC prices has corrected sharply by USD90-100/t to USD485/t (FOB China basis) in a span of just two months. Concerns about demand slowdown had been simmering for a while. But, the recent supply glut by Chinese steel mills has sent steel prices in a tailspin during Nov’18. Chinese steel production increased by 9.1% to 82.6mt in Oct’18 and 6.4% to 782.5mt YTD CY18. This has changed the economics of HRC imports into India. Even after paying all applicable duties and freight, the landed cost of import is now cheaper by ~INR3000/t (Exhibit 1). This may result in a corresponding price correction in the Indian steel market over the next two months and could hurt margins of Tata Steel (TATA), JSW Steel (JSTL), SAIL and Jindal Steel & Power (JSP).