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Shares of JSW Steel have declined by nearly 11% since the government levied export duty on steel effective 22 May. This along with dull international prices has resulted in the domestic price of this commodity correcting significantly.

According to SteelMint, domestic hot-rolled coil prices plunged by 20% from the highs seen in April to 63,100 per tonne as on 8 June.

“Management expects price declines to stabilize unless coking coal costs come down from present levels of around $400 per tonne," said analysts at Nomura Financial Advisory and Securities (India) in a report on 13 June. The brokerage hosted JSW Steel at Nomura Investment Forum

However, the imposition of export duty means lower realization on shipments. Even so, the company will continue to export 15-20% of its production in FY23 in order to maintain long-term customer relations.

“Relatively lower realization on exports by 15% and with exports accounting for 15% of management’s sales estimates, overall net steel realization can be impacted by 2.0-2.5% for FY23F," added the Nomura report.

But there is some respite from the softening of raw material costs such as coking coal and iron ore. However, this impact is expected to reflect in the financials with a lag. Thus, the company expects Ebitda (earnings before interest, tax, depreciation and amortization) per tonne to stabilize from Q2FY23.

On the demand front, there could be a slowdown in construction activity due to the upcoming monsoon season which would weigh on steel demand. On the other hand, the demand from automobile sector continues to be firm with increased traction seen for passenger vehicles and commercial vehicles.

In H1FY23, the company anticipates mill-level inventories to rise but the channel inventories to be softer in the near term due to subdued demand. As prices stabilize, it foresees buying to re-emerge from the later part of June.

Meanwhile, it targets to achieve brownfield capacity expansion at $400 per tonne which is considerably below the $1000 per tonne replacement cost of steel plants globally. “We believe management focus on relatively low-cost brownfield expansion, digitalization and other cost measures will structurally boost profitability," added the Nomura report.

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