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Steel
Jan steel consumption growth of ONLY 1.2% highlights why INDIAN steel prices are at a DISCOUNT to global prices
• A positive month of demand growth after 2 negative months, but just at
1%: Jan-11 domestic steel consumption increased by only 1% y/y. While this
comes after 2 months of y/y declines, and this is a 13% m/m increase, we
believe 1% growth in an economy growing at 8%, does not bode well for
steel/cement demand (We expect Indian cement dispatches to grow by only 1-
2% in January). We also do not subscribe to the view that the high base of last
year is distorting growth numbers (the base would remain challenging till July),
as a strong overall economy should translate into strong underlying steel
demand growth (which is not happening as of now, last 4 months steel
consumption growth stood at 3% y/y). YTD steel cons growth stands at 7%
• But steel production hits new highs, underscoring mismatch between
demand and supply: Finished steel prod at 5.9MT increased 9% y/y (+13%
m/m), hit annualized levels of 71MT and was the highest ever monthly
production (as far back as we have data for). The sharp difference between
production and consumption in Jan-11 highlights inventory build up in the
system, even as imports do not take place. Since Sept-10, prod has been higher
than consumption with cumulative difference at 3MT over last 5 months. We
believe this problem of increasing domestic supply from higher prod is only
going to worsen over the next 12 months, with large capacities set for
commissioning. YTD prod growth stood at 9%.
• So imports kept out, but no material pick up in exports: The increasing
domestic supply, combined with weak demand (and prices at a discount to
global prices) has kept out steel imports with Jan-11 imports at 0.2MT, down
67% y/y and down 12% m/m. However as we have feared, there has been no
sharp pick up in exports with Jan-11 exports at 0.3MT down 7% y/y. We have
believed that a large part of India's steel industry is based on purchased iron ore
and coking coal, which in the export market, means that most of Indian
producers (barring those like TATA, which have captive iron ore and coking
coal) do not have any competitive advantage. Unless we see a sharp pick up in
domestic demand (monthly run rate of ~6MT), we believe Indian steel producers
would either need to reduce utilization levels or reach out to the export market.
• This means domestic HRC prices would remain at a discount to global
prices: While the metals press (Bloomberg, MB, SBB) indicating a potentially
large ($100/MT) price hike in CIS HRC export prices (currently at $730?MT,
China export HRC at $770/MT), we find it very difficult to see any such price
increase of Rs4.5K/MT going through in the domestic market. After
incorporating the recent (Jan+Feb) announced price increases of Rs4K/MT,
domestic HRC prices at Rs36K/MT are at discount to both CIS and China
import prices. Additionally we believe the total price hike of Rs4K/MT was not
absorbed by market entirely. The only positive is than if steel prices correct
globally in April, Indian prices would have a high safety cushion.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steel
Jan steel consumption growth of ONLY 1.2% highlights why INDIAN steel prices are at a DISCOUNT to global prices
• A positive month of demand growth after 2 negative months, but just at
1%: Jan-11 domestic steel consumption increased by only 1% y/y. While this
comes after 2 months of y/y declines, and this is a 13% m/m increase, we
believe 1% growth in an economy growing at 8%, does not bode well for
steel/cement demand (We expect Indian cement dispatches to grow by only 1-
2% in January). We also do not subscribe to the view that the high base of last
year is distorting growth numbers (the base would remain challenging till July),
as a strong overall economy should translate into strong underlying steel
demand growth (which is not happening as of now, last 4 months steel
consumption growth stood at 3% y/y). YTD steel cons growth stands at 7%
• But steel production hits new highs, underscoring mismatch between
demand and supply: Finished steel prod at 5.9MT increased 9% y/y (+13%
m/m), hit annualized levels of 71MT and was the highest ever monthly
production (as far back as we have data for). The sharp difference between
production and consumption in Jan-11 highlights inventory build up in the
system, even as imports do not take place. Since Sept-10, prod has been higher
than consumption with cumulative difference at 3MT over last 5 months. We
believe this problem of increasing domestic supply from higher prod is only
going to worsen over the next 12 months, with large capacities set for
commissioning. YTD prod growth stood at 9%.
• So imports kept out, but no material pick up in exports: The increasing
domestic supply, combined with weak demand (and prices at a discount to
global prices) has kept out steel imports with Jan-11 imports at 0.2MT, down
67% y/y and down 12% m/m. However as we have feared, there has been no
sharp pick up in exports with Jan-11 exports at 0.3MT down 7% y/y. We have
believed that a large part of India's steel industry is based on purchased iron ore
and coking coal, which in the export market, means that most of Indian
producers (barring those like TATA, which have captive iron ore and coking
coal) do not have any competitive advantage. Unless we see a sharp pick up in
domestic demand (monthly run rate of ~6MT), we believe Indian steel producers
would either need to reduce utilization levels or reach out to the export market.
• This means domestic HRC prices would remain at a discount to global
prices: While the metals press (Bloomberg, MB, SBB) indicating a potentially
large ($100/MT) price hike in CIS HRC export prices (currently at $730?MT,
China export HRC at $770/MT), we find it very difficult to see any such price
increase of Rs4.5K/MT going through in the domestic market. After
incorporating the recent (Jan+Feb) announced price increases of Rs4K/MT,
domestic HRC prices at Rs36K/MT are at discount to both CIS and China
import prices. Additionally we believe the total price hike of Rs4K/MT was not
absorbed by market entirely. The only positive is than if steel prices correct
globally in April, Indian prices would have a high safety cushion.
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