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Domestic steel mills are in a quandary, falling steel prices and high coking coal prices are keeping domestic spreads low while falling export realisation (with added impact of export duties) are clouding export potential, as per brokerage and researc firm Edelweiss. 

That said, the brokerage house believes JSW Steel, Jindal Steel and Power (JSPL) and Shyam Metalics are likely to benefit from the steep fall in domestic steel prices while Tata Steel is expected to gain from relatively high coking coal proportion and contracts.

The brokerage has maintained its cautious outlook on the ferrous space with ‘Reduce’ rating on JSW Steel (target price: 471) and Steel Authority of India (SAIL) with target price of 57, whereas it has ‘Hold’ on JSPL (TP: 385) and Tata Steel (TP: 985). 

Meanwhile, Shyam Metalics has remained Edelweiss' sole ‘Buy’ in the ferrous space, benefitting from lower iron ore prices and nil export duty on ferroalloys (17% revenue), and has a target price of 353 on the metal stock.

“Going ahead, while we await demand to pick up, we view the sharp spike in steel and aluminium exports cautiously. This suggests the government might go slow on reining in exports if demand stays subdued. We retain our cautious stance on the ferrous space with a ‘BUY’ only on Shyam Metalics," the note stated.

The brokerage is particularly cautious on demand outlook as a renewed lockdown of one district in Shanghai has raised concerns that the full reopening of the financial centre could be delayed by a resurgence in cases.

“We view China’s trade data as double-edged. On the one hand, increased copper and iron ore imports point to a possible revival in demand and, on the other, recordhigh Al exports and significantly high steel exports undermine the oft-stated policy of reining in exports in order to reduce carbon footprint," Edelweiss added.

If Al/steel exports continue to remain at high level, in the event of weakness in domestic demand persisting, there might be that prices of these commodities coming under pressure.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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