India Steel Sector:: Profits could jump in 4Q FY11 : Standard Chartered Research,

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Profits could jump in 4Q FY11  
 Global steel prices have risen at a scorching pace in the past couple of months
 Indian steel prices have also risen, narrowing the import parity gap
 Implies significant recovery in steel companies’ profitability in 4Q FY11
 We maintain OUTPERFORM on SAIL and IN-LINE on JSW Steel


Global steel prices rising  
Global steel prices have recovered from their November lows, driven mainly by supply chain restocking and strengthening raw material prices. Steel mills’ inventories are still running low and
further hardening of steel prices cannot be ruled out.
Global steel prices have risen at a scorching pace in the past two months
 In the past few weeks, global steel prices have risen sharply. Shown below is the price of
HRC in important regions.


Driven by inventory restocking
Steel users were destocking inventory in the better part of the past two quarters. Now it is the
reverse, inventory is being restocked at the user level in the current quarter. We expect this
restocking cycle to continue until 2Q CY11.


And extraordinary strength in input raw materials
As shown in the graphs, raw materials such as HCC (hard coking coal) and iron ore have been
extra strong in the past couple of quarters. While there has been a structural shortage (refer to
our report ”Whatever happened to new supply”, authored by Jeremy Gray and Subu Varada,
dated Aug 19, 2010) in coking coal and iron ore, the recent rallies in coking coal have been
driven by the extraordinary weather conditions in Australia.