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Steel
Domestic HRC prices likely to be hiked by 5-6% in
Feb, but still likely to remain below import parity levels
• Domestic HRC price increase of 5-6% likely in Feb: We expect Indian steel
mills to increase domestic HRC prices by 5-6% in Feb (Rs1500-2000/MT) from
current levels of Rs34KT/MT in February. Given the recent increase in
imported steel prices (both Chinese and CIS HRC export prices are above
$700/MT), the domestic steel price hike is not surprising (Please refer to our
update- ‘Steel: Import HRC prices set for another increase in Feb, while spot
coking coal hits $290/MT- Domestic demand faces tough base comps’ dated
12th Jan, 2011). At current import prices of $730/MT for CIS HRC and
$710/MT for China HRC, the landed import parity price is Rs38KT/MT
and Rs37KT/MT for CIS & China HRC respectively. Hence domestic
Indian steel prices even after the Feb price hikes would continue to be
below import parity prices. While mills may announce price increases of as
much as Rs3000/MT (~10%), we believe the market may not be able to absorb
such a large price increase.
• Positives and negatives from the discount: It keeps the imports out and
means any potential import price correction in March/April would not flow
through easily into domestic prices, but also highlights the state of domestic
market: While the continued discount between domestic and import prices, is
likely to result in muted steel imports in HRC by the trade segment, more
importantly the discount also highlights the tough state of the domestic market
with supply increasing (and set to increase further through the year with new
HRC capacity from JSW, ISPAT, Essar and TATA to hit the market over next
12 months), but also sluggish demand. Both cement and steel have reported 2
consecutive months of y/y decline in national consumption. We continue to wait
for demand recovery. In Steel, slowing growth rate in auto sales, would on the
margin impact steel demand.
• Long steel prices increases have stalled: After a sharp increase early in
January, long steel price increase has stalled (imports, coking coal are not
important variables for long steel prices) and more accurately reflect the
domestic demand from the construction sector.
• Spot coking coal- Not many transactions so far by Indian mills, cost
pressure only in June/Sept : Spot coking coal price have surged past $300/MT,
but so far Indian mills have not yet entered the spot market and thus March
quarter profitability is likely to see very sharp q/q improvement (please see our
report –‘Indian Steel: Sharp Earnings Volatility Ahead; Mapping the lag impact
of the 3 key variables into the P&L’ dated 24th Sept, 2011).
• TATA Steel remains our top OW in the Indian metals and mining space. We
expect TATA’s relative out performance to continue given attractive valuations,
strong India profitability and India expansion
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Steel
Domestic HRC prices likely to be hiked by 5-6% in
Feb, but still likely to remain below import parity levels
• Domestic HRC price increase of 5-6% likely in Feb: We expect Indian steel
mills to increase domestic HRC prices by 5-6% in Feb (Rs1500-2000/MT) from
current levels of Rs34KT/MT in February. Given the recent increase in
imported steel prices (both Chinese and CIS HRC export prices are above
$700/MT), the domestic steel price hike is not surprising (Please refer to our
update- ‘Steel: Import HRC prices set for another increase in Feb, while spot
coking coal hits $290/MT- Domestic demand faces tough base comps’ dated
12th Jan, 2011). At current import prices of $730/MT for CIS HRC and
$710/MT for China HRC, the landed import parity price is Rs38KT/MT
and Rs37KT/MT for CIS & China HRC respectively. Hence domestic
Indian steel prices even after the Feb price hikes would continue to be
below import parity prices. While mills may announce price increases of as
much as Rs3000/MT (~10%), we believe the market may not be able to absorb
such a large price increase.
• Positives and negatives from the discount: It keeps the imports out and
means any potential import price correction in March/April would not flow
through easily into domestic prices, but also highlights the state of domestic
market: While the continued discount between domestic and import prices, is
likely to result in muted steel imports in HRC by the trade segment, more
importantly the discount also highlights the tough state of the domestic market
with supply increasing (and set to increase further through the year with new
HRC capacity from JSW, ISPAT, Essar and TATA to hit the market over next
12 months), but also sluggish demand. Both cement and steel have reported 2
consecutive months of y/y decline in national consumption. We continue to wait
for demand recovery. In Steel, slowing growth rate in auto sales, would on the
margin impact steel demand.
• Long steel prices increases have stalled: After a sharp increase early in
January, long steel price increase has stalled (imports, coking coal are not
important variables for long steel prices) and more accurately reflect the
domestic demand from the construction sector.
• Spot coking coal- Not many transactions so far by Indian mills, cost
pressure only in June/Sept : Spot coking coal price have surged past $300/MT,
but so far Indian mills have not yet entered the spot market and thus March
quarter profitability is likely to see very sharp q/q improvement (please see our
report –‘Indian Steel: Sharp Earnings Volatility Ahead; Mapping the lag impact
of the 3 key variables into the P&L’ dated 24th Sept, 2011).
• TATA Steel remains our top OW in the Indian metals and mining space. We
expect TATA’s relative out performance to continue given attractive valuations,
strong India profitability and India expansion
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