Home >market >mark-to-market >Steel stocks get winter chill as China demand issues resurface

Shares of Indian steel makers JSW Steel Ltd, Jindal Steel and Power Ltd, and Steel Authority of India Ltd (SAIL) continue to head south. Compared to a 10% fall in the Nifty 500 index, the stocks have lost 26-34% in the last three months. The fall in steel prices in China have also sparked fears of a price correction in India.

Prices in China declined 15% in two months, tracking a moderation in demand in the automobile and real estate sectors. Production, however, did not see commensurate cuts. Rather, it remained elevated as pollution-related production cuts remained weak this year, point out analysts at Nomura Securities International Inc. This pushed up exports from China, upsetting the global demand-supply equation.

Prices in India began to soften from November. However, thanks to import duties, the decline has been rather gradual until now. But as cheap imports find their way into India, the price fall is expected to gather pace, impacting profitability of domestic producers. “Even after paying all applicable duties and freight, the landed cost of import is now cheaper by 3,000 per ton. 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, JSW Steel, SAIL and Jindal Steel and Power," analysts at Motilal Oswal Securities Ltd said in a note on 29 November.

These concerns have led to cuts in earnings estimates. The relatively slower fall in raw material costs is not helping either.

Unless the Chinese government eases policy to spur activity, the slowdown in the real estate sector, a large user of steel, can weigh on demand recovery. This can sharply drive down prices, impacting margins of the global industry. “Prices increased sharply earlier this year on supply chain disruption, the converse is also possible, we believe lower demand can result in periods of very weak prices," warn analysts at Kotak Institutional Equities Research.

Still, the scenario is not as gloomy as the fall in stock prices indicates, according to some analysts. While profit margins may ease after a period of strong expansion in the past 18 months, companies will be doing well on absolute earnings terms, points out ratings agency Icra Ltd. This is largely on the back of the fact that domestic demand and volumes are still holding up.

Further, steel plant utilization levels are fairly high in China at 85%, limiting the scope for a supply glut. If the demand in China rebounds from the current seasonal slowdown, then prices may see a noticeable recovery. “We anticipate that post the seasonally weak winter season, steel prices will start rebounding in China and will strengthen further in 1HFY20 on possible infrastructure stimulus in China," analysts at Nomura said in a note.

Of course, much depends on the demand recovery in China and whether its government moves to counter the slowdown.

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