Home >Markets >Mark To Market >A Chinese demand contraction may test mettle of steel stocks

The rise in global steel prices in the recent past has added a bit of certainty to the profitability of steel companies. But that may not add much to cheer investors as Chinese steel demand may start to taper off, say analysts. Stocks may be already reflecting the benefits of the steel uptick so far having risen between 9-44% in the past two months.

With the Chinese economic growth in high gear, its infrastructure and property sector are driving steel demand. Steel export prices for China are up nearly 30% since May this year. Domestic prices have risen 8% riding on the back of improving international prices.

“In the steel market, China is a sizeable player. Demand in the Chinese market is leading to global steel prices moving up. The price rise has nothing to do with domestic demand," said Siddharth Gadekar, analyst, Equirus Securities.

Bouncing back
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Bouncing back

Domestic demand remains lower than pre-covid levels. But companies have started to operate at full capacity. Analysts point that even if domestic demand does not revive, producers will be able to cater to export markets.

Further, lower domestic raw material prices of iron ore and coking coal are expected to improve profitability.

Hence, a rise in steel prices and increasing sales volumes coupled with lower input costs could drive an improvement in operating margins in the coming quarters, say analysts.

While all that is good, further growth will hinge on a continued uptick in Chinese demand.

“While we expect the robust steel demand in China to continue due to the lag effect of the implemented stimulus measures, and further accommodative fiscal and monetary policy, we believe the hot-rolled coil (HRC) prices rally could be in its last leg," said analysts at HSBC Securities and Capital Markets in a note. They also said that due to the high base and end of the 13th five-year plan, steel demand could likely taper in China.

That may not be good for Indian steel stocks.

“With the market caps of India steel producers strongly correlated to Chinese HRC prices, we see downside risks to flat steel producers," noted the HSBC report.

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