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Steel
India Steel: Near term air pocket ahead, would be selective buyer; Sector
wise demand analysis points to subdued demand
Global Steel: price declines over the next 2 quarters likely, but strong
demand to follow; H2CY11E to be better than H2CY10: Spot steel prices have
started correcting with Chinese domestic HRC and CIS export HRC prices coming
off from peaks. As J.P. Morgan European steel analyst Alessandro Abate in a
detailed report on steel (European Steel 360#3, dated 7th March 2011) highlights,
near term correction is likely driven by increased steel utilization rates, higher
working capital holding back business expansion at the end of the value chain and
scrap weakness given the turmoil in the Middle East. Alessandro expects demand
to recover as global IP remains strong, and H2CY11 to be better than H2CY10
given US economic recovery and reduced risk of de-stocking.
Implications for Indian steel: Domestic HRC prices have lagged import prices
and against this backdrop we believe Indian steel mills have some protection as
global prices start correcting (domestic HRC prices equivalent to $725/MT CIS
HRC v/s current prices of ($775-825/MT). Demand supply dynamics remain poor
and cost pressure from iron ore and coking is likely to remain high for nonintegrated
companies (though ease from Sept-11). As we highlighted in our report
Sharp Earnings Volatility Ahead; Mapping the impact of the 3 key variables into
the P&L’ dated 24th Jan, 2011, we expect the March/June quarters to be very
good while Sept/Dec would be weak. Against this backdrop we would be
buyers of TATA which benefits from integration in India, has the very
profitable 3MT capacity coming through by Dec-11, and Corus operations
stabilization continues. Returns are likely to be back ended but on a relative
basis should outperform domestic peers. In our view, TATA is relatively underowned
by FII v/s DII and this provides potential re-rating upside as India earnings
see a step up in FY12E.
• Sector-wise demand analysis: We take a deep dive into sub-sector-wise
analysis of flats, longs and HRC. Long steel consumption CAGR over
FY05-10 stood at 13% in which house building (14% share) was at 15%
CAGR; Public Bldg (14% share) was at 10% CAGR; Industrial Construction
(11% share) was at 18% CAGR; Eng units (12% share) was at 10% CAGR.
Power also grew at 14% CAGR. The lowest increase was in Railways (6%
share) where CAGR was only 6%. For Flat steel overall CAGR stood at
10%. Demand is more spread out across sub segments, with the 2 largest
segments Tube makers (16% share) at 8% CAGR and CR units (13% share)
at 6% CAGR. For HRC, 65% is consumed by CR units, GP/GC and Tube
makers. GP/GC is mainly used in construction while CR is used across
Autos, durables and engineering units. Net net without the revival of the
construction sector, it is difficult to see steel demand going back to 10%
growth rates any time soon.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steel
India Steel: Near term air pocket ahead, would be selective buyer; Sector
wise demand analysis points to subdued demand
Global Steel: price declines over the next 2 quarters likely, but strong
demand to follow; H2CY11E to be better than H2CY10: Spot steel prices have
started correcting with Chinese domestic HRC and CIS export HRC prices coming
off from peaks. As J.P. Morgan European steel analyst Alessandro Abate in a
detailed report on steel (European Steel 360#3, dated 7th March 2011) highlights,
near term correction is likely driven by increased steel utilization rates, higher
working capital holding back business expansion at the end of the value chain and
scrap weakness given the turmoil in the Middle East. Alessandro expects demand
to recover as global IP remains strong, and H2CY11 to be better than H2CY10
given US economic recovery and reduced risk of de-stocking.
Implications for Indian steel: Domestic HRC prices have lagged import prices
and against this backdrop we believe Indian steel mills have some protection as
global prices start correcting (domestic HRC prices equivalent to $725/MT CIS
HRC v/s current prices of ($775-825/MT). Demand supply dynamics remain poor
and cost pressure from iron ore and coking is likely to remain high for nonintegrated
companies (though ease from Sept-11). As we highlighted in our report
Sharp Earnings Volatility Ahead; Mapping the impact of the 3 key variables into
the P&L’ dated 24th Jan, 2011, we expect the March/June quarters to be very
good while Sept/Dec would be weak. Against this backdrop we would be
buyers of TATA which benefits from integration in India, has the very
profitable 3MT capacity coming through by Dec-11, and Corus operations
stabilization continues. Returns are likely to be back ended but on a relative
basis should outperform domestic peers. In our view, TATA is relatively underowned
by FII v/s DII and this provides potential re-rating upside as India earnings
see a step up in FY12E.
• Sector-wise demand analysis: We take a deep dive into sub-sector-wise
analysis of flats, longs and HRC. Long steel consumption CAGR over
FY05-10 stood at 13% in which house building (14% share) was at 15%
CAGR; Public Bldg (14% share) was at 10% CAGR; Industrial Construction
(11% share) was at 18% CAGR; Eng units (12% share) was at 10% CAGR.
Power also grew at 14% CAGR. The lowest increase was in Railways (6%
share) where CAGR was only 6%. For Flat steel overall CAGR stood at
10%. Demand is more spread out across sub segments, with the 2 largest
segments Tube makers (16% share) at 8% CAGR and CR units (13% share)
at 6% CAGR. For HRC, 65% is consumed by CR units, GP/GC and Tube
makers. GP/GC is mainly used in construction while CR is used across
Autos, durables and engineering units. Net net without the revival of the
construction sector, it is difficult to see steel demand going back to 10%
growth rates any time soon.
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