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Steel manufacturers are far from regaining their lost shine as operating conditions are likely to worsen before stabilizing. The demand scenario remains muted. Also, the softening trends in costs of key commodities such as coking coal and iron ore are seeing initial signs of a reversal.

However, domestic hot-rolled coil (HRC) prices have remained largely stable in the last two weeks at 57,300 per tonne, according to SteelMint. This comes after a long period of free fall in prices.

Trend reversal
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Trend reversal

Domestic steel prices are still at a premium to import parity, implying further downside risks, analysts said. Supply chain issues, which ultimately affect the quantum of imports are partly driving this premium. Reasons such as lower production by steel mills also support the premium.

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Even so, unless there is a significant pick-up in global demand near-term weakness in domestic steel prices cannot be ruled out.

“Demand in China, the biggest player in metals, has been buffeted by policy tightening-induced real estate slowdown and lockdowns. However, it is hard to see Chinese demand supply balance get incrementally worse from here. Emergence from lockdowns, stimulus support, and production curtailments could provide support. Chinese HRC margins have historically bottomed out cyclically at these levels," said Satyadeep Jain, an analyst at Ambit Capital.

In any case, the September quarter (Q2FY23) is expected to be weak on the margins front, because of the impact of seasonality accompanied by the plunge in steel prices after the imposition of export duty effective 22 May. However, coking coal costs, which started to decline from May end, will provide some respite as this will reflect in the financials with a lag. Against this backdrop, Q3 is likely to be better.

However, this requires closer tracking, as input costs have started inching up again after a brief period of softening. As the chart alongside shows, coking coal prices dropped from the high levels of $506.5 per tonne in May to $196 per tonne in early August.

However, the last two weeks saw a price increase of 34% to $263 per tonne. “With firm thermal coal prices because of the ongoing energy crisis in Europe, coking coal is witnessing replacement demand," said Kotak Institutional Equities analysts in a report on 22 August.

Prices of another key raw material, iron ore, have also risen. NMDC Ltd, India’s key supplier of iron ore, hiked prices by 100-200 per tonne after a series of cuts. Effective 11 August, the price of lump ore and fines are 4,100 and 2,910 per tonne, respectively. NMDC’s prices are at a significant discount to import parity and a further downside is unlikely, analysts said.

“Margin recovery in H2 FY23E appears delusional based on spot spreads, as we see downside risks to prices and upside risks to costs. Amid the upcoming margin contraction and uncertain steel price outlook, we expect steel stocks to remain under pressure," Kotak said.

Shares of Tata Steel, JSW Steel, and Jindal Steel & Power are down by 17-32% from their respective 52-week highs. On the bright side, the sharp drop in share prices means valuations are undemanding. Removal of export duty on steel would have a positive sentimental impact on share prices as this is a key overhang. However, in view of weak global demand, it remains to be seen if volume growth will be extraordinary.

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ABOUT THE AUTHOR
Vineetha Sampath
Vineetha Sampath is a chartered accountant and is experienced in the field of research analysis. She joined Mint's Mark to Market team recently and this is her first stint in journalism.
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Updated: 24 Aug 2022, 02:54 PM IST
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