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Business News/ Markets / Mark To Market/  Will steel stocks harden in 2023?

Will steel stocks harden in 2023?

Steel company shares have recovered significantly from respective 52-week lows on expectations of the reopening of the Chinese economy.

The average price in December is down by around 56% from the highs in March. Premium
The average price in December is down by around 56% from the highs in March.

The year 2022 was a mixed bag for steel prices. Concerns of supply disruption following the Russia-Ukraine war came as a shot in the arm for metal prices. Among the beneficiaries was steel, considering that both countries are significant contributors to the global steel supply chain.

As a result, the average price of domestic hot-rolled coil (HRC) surged to a multi-year high of 76,025 per tonne in April, according to data by SteelMint. However, the rally did not sustain due to the subdued global demand environment.

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According to Satyadeep Jain, an analyst with Ambit Capital, the demand in China—a crucial market for metals, was at a peak in September 2021 but, since then, started moderating. “After a brief rise in prices in March-April, demand downturn continued, which led to a steep fall in metal prices," he added.

Besides, the imposition of export duty on steel in late May by the government weighed on prices. Consequently, the HRC prices dropped sharply. Reflecting the pain, shares of key steel makers, such as JSW Steel and Tata Steel, slid to 52- week lows in May and June, respectively.

Steel company shares have recovered significantly from respective 52-week lows on expectations of the reopening of the Chinese economy. Besides, the removal of export duty on steel had a positive sentimental impact. But further upside depends on how global demand pans out, which is also necessary for a pick-up in export volumes.

“While the recent price hikes in global markets appear encouraging, we feel it is too early to call it a cyclical upturn," said analysts at ICICI Securities Ltd. A dramatic rise in covid cases in China, lower consumption due to the destocking in Europe, and the advent of a seasonally weak winter period in China are among the factors that could cap the uptick in steel prices, said the ICICI report.

Note that recovery in global steel prices augurs well for domestic HRC prices. But the problem is that there is limited clarity on whether domestic steel prices have bottomed out. So far in December, HRC prices are down by 4% sequentially. Even so, the prices are at a premium to import prices from South Korea and Japan, implying further downside risks, said analysts.

What’s more, elevated costs of inputs, such as coking coal, have meant increased pressure on the margins of steel companies. For instance, JSW Steel’s consolidated Ebitda in the first six months of FY23 fell 70.7% year-on-year. Ebitda is short for earnings before interest, taxes, depreciation, and amortization. Unfortunately, there is limited cheer on this front.

Another key input, iron ore, has also seen a rise in prices recently. NMDC Ltd, India’s key supplier of iron ore, hiked the price of lump ore and fines by 300 per tonne each after the removal of export duty in mid-November. Even so, the prices are at a significant discount to import prices, which means there is a possibility of a further upside. This would weigh on the margins of steelmakers.

On the other hand, there has been a sharp correction in the prices of coking coal. According to CoalMint, the average price in December is down by around 56% from the highs in March. However, it remains to be seen if it sustains.

According to analysts at Kotak Institutional Equities, while steel margins may recover in Q3FY23 on lower coking coal costs, a further expansion appears challenging, given the bottoming out of iron ore prices, downward pressure on steel prices and weak export markets.

Further, analysts cautioned that the valuations of steel stocks have recently run up.

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Vineetha Sampath
Vineetha is a part of the Mark to Market team, which specializes in offering cutting edge commentary on stocks and financial reports of companies. Vineetha looks at varied number of sectors, including automobile, aviation, FMCG, internet companies and metals. If you want to know -- why entry-level auto sales are not picking up; or which FMCG companies would be more adversely impacted due to weak rural demand; or why IndiGo’s landing is about to get tougher? You will find these answers and more in her stories. Vineetha is a chartered accountant.
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Published: 28 Dec 2022, 09:55 PM IST
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