Analysts are advising a cautious stance on the steel sector due to a combination of factors.
The major one is that China has maintained momentum on steel exports in CY24 and there could also be domestic over-supply in the medium-term.
Trade data for Jan-Feb’24 shows that China’s finished steel exports rose 31 per cent year-on-year (Y-o-Y) to 15.9 MT.
Exports are high due to weak Chinese domestic steel demand which contracted 2 per cent Y-o-Y in CY23 due to a weak housing market (new housing starts in CY23 were the lowest since CY09).
The PRC government-backed China Metallurgical Industry Planning and Research Institute forecasts Chinese steel consumption to drop 1.7 per cent Y-o-Y in CY24.
Iron ore imports by China are still rising implying steel production and hence exports will remain high.
As such global prices are likely to see downward pressure and domestic Indian steel makers may spread compression despite robust demand.
HRC, rebar, and other categories of iron and steel products are likely to see flat prices or a downward trend.
To some extent, weak coking coal prices may compensate to maintain margins.
Consensus estimates for steel revenues and earnings may not yet be factoring in spread compression adequately and valuations are on the high side.
A sharp increase in blast furnace-based steel capacity in India over the next three years may also create a supply overhang and thus create further margin pressures.
At the same time, since the extra capacity coming online will be serviced by domestic iron ore, ore prices could trend higher.
Moreover, thermal coal demand is higher as electricity demand is soaring and hence, there may be upward pressures on the cost front.
India currently accounts for 20 per cent of global coking coal imports and coke prices are weak, which may balance costs somewhat and the possible scaling up capacity will also make operations more cost-efficient.
Domestic steel prices are likely to settle close to import parity, while this situation of China's macro-weakness and steel overproduction persists.
Indian steel makers would have trouble relying on exports to shift offtake at these prices without accepting further margin compressions.
Optimists are betting on a China stimulus, which leads to a revival in domestic demand within China and reduce Chinese exports.
But until there are signs of that occurring, the impact on Indian steelmakers will be negative.
This could result in downgrades for steel majors based in India through the near term and the medium term.
Some analysts are already downgrading valuations and price targets for Tata Steel, JSW Steel, and JSPL, while others are cautioning against exposures in this sector.
