Mumbai: This year’s recovery in the steel sector is turning out to be short-lived. A recent correction in steel prices, which has seen hot rolled coils down about 10% this past year, has resulted in several steel producer stocks ending up in the red.

Stocks of Tata Steel Ltd, Jindal Steel and Power Ltd, Steel Authority of India Ltd, JSW Steel Ltd were down 1.9% to 4.4% on Monday, and have recovered only marginally on Tuesday. Investors are evidently turning wary of the sector’s immediate prospects.

Perhaps rightly so. The knock-on effect of the trade wars has been keeping pressures on steel prices across the globe. Global trade volumes have slumped for the first time in nine years. As a result, exports are slowing down leading to a rise in domestic inventory buildup.

“We see risks for steel players as 1) exports have declined by 30% YoY to 0.7mt due to a demand slowdown in traditional markets of South East Asia; 2) weakness in re-rollers’ segment owing to auto slowdown; and 3) inventory build-up of 0.5mt. We believe lower exports volume is likely to intensify competition in the domestic market and impact export-heavy companies," said Edelweiss Securities Ltd in a note to clients.

Besides, domestic production remains firm in which will continue to keep the lid of steel price upticks. On the flipside, iron prices have remained firm due to supply disruptions. The rise in Chinese iron ore prices on a year on year basis of 85.27% to $110.44 starkly contrasts with the fall in Chinese hot-rolled prices by about 10% in the past year. This will add to the margin pressures on steel producers.

To top it, demand from one of the largest consumers of flat steel, the automobile sector, is likely to be curtailed going forward. Auto sales have been contracting which is leading to an inventory build-up in the auto sector.

“Weak automotive demand, coupled with a rising threat from imports and unattractive export markets have put flat steel producers at higher risk compared to long producers. TATA and JSTL – India’s top two flat producers accounting for the majority sales to the auto segment – are likely to be impacted negatively," noted HSBC Securities and Capital Markets India (Private) Ltd in a note to clients.

Besides, analysts also don’t rule out the possibility of higher imports which could further dampen domestic prices. “Despite relatively healthy domestic consumption growth, we see challenging times ahead for the steel sector due to potentially higher imports and pressure on domestic realisation," said Edelweiss.

For now, much of the sector’s prospects hinge on how the domestic market shapes up. In the near term, though, there’s not much of a steel demand recovery in sight.

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