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Photo: Bloomberg
Photo: Bloomberg

Steel stocks jump amid slowdown, but revival may be some time away

Price realizations are better in the export market, firms are already beginning to boost exports in their sales mix

Stock prices of steel companies have jumped on expectations that they are going to witness increasing profitability in the second half. While businesses were impacted during the over 70-day lockdown, production volumes of many steel companies have now started inching up.

That has kindled hopes that a slow and gradual recovery in the second half is on the cards, especially for integrated steel companies.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

“The large integrated steel companies are better placed in the current cycle versus the previous one, due to market-share gains from secondary producers, and their ability to increase share of exports will likely offset the decline in domestic sales volumes," said Morgan Stanley analysts in a note to clients.

Steel companies’ stocks surged last week, with shares of Tata Steel Ltd rising about 15%. In fact, profitability is also expected to look better in the second half.

“We think lower profitability in this cycle will be due to lower fixed cost absorption, while spreads will be better than in the previous cycle. With gradual demand recovery in F2H21 (low base effect) and an inventory re-stocking cycle, profitability should improve sharply," said the Morgan Stanley report.

But, for the moment, steel companies are not yet out of the woods. Prices of steel products have been falling. Last week, domestic hot-rolled coil prices fell by about 300 a tonne, while long-product prices have been faring better, noted analysts. And, that is not helping the current situation.

However, the saving grace for the sector is exports. Price realizations are better in the export market, and companies are already beginning to increase exports in their sales mix.

But, lacklustre domestic demand and lower prices are expected to keep margins week in the next quarter.

“We believe margins of steel companies (particularly flats-heavy manufacturers) would come under pressure. Furthermore, our channel checks indicate that steel companies may offer a discount of up to 1,500/t on flat products and 1,000/t on long products in the domestic market to boost sales volume. This might further dent margins," said Edelweiss Securities analysts in a note to clients.

Some companies reported better volume pickup in May, but that could be attributed to dealers’ re-stocking, and not to a pickup in demand.

Even so, the recovery in the sector is going to be slow and gradual. A real pick-up in demand will be key, which may be witnessed in October. The recent stock price action does not seem to be factoring this in.

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