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Steel prices peaking
Global steel prices have risen by ~25% since Dec-10 as buyers started
stocking up ahead of cost push. However, prices seem to have peaked in
Mar-11 - earlier than expected – and look set to decline over 2QCY11 as
buyers enter de-stocking mode and costs recede. The decline in prices
might not be much though, given that iron ore prices have stabilized at
fairly high levels. Unlike previous up-cycles, steel stocks have actually
come off in the current up-cycle and hence might not decline much when
prices weaken in 2Q. Overall, steel prices continue to move in ‘minicycles’
and we don’t expect a sustained improvement in convertor
margins unless global utilization levels improve, which needs a broader
economic revival. In this context, company specific triggers continue to
underpin our investment thesis. Tata Steel & JSPL remain top picks.
Steel prices have peaked earlier than expected
Steel prices are up ~25% since Dec-10 as steel buyers started stocking up ahead
of the anticipated cost push in 1HCY11.
Asian HRC prices are at US$730/t in Mar-11, up 21% from Dec-10. N. Europe
prices are at US$896/t, up 29% while Indian prices are up by ~US$120/t.
We had expected steel prices to peak in Apr-May and then correct by mid-CY11 as
buyers enter into destocking phase and raw material prices recede.
However, steel prices appear to have peaked in Mar itself and are already showing
signs of weakness. Asian HRC is already down 2% from the peak. There is news
that Japanese/Korean export prices have come off too. European steel prices are
still strong but volumes are thin and buyers remain on the sidelines.
Indian producers might hold on to prices for a bit longer even while Asian prices
decline. However, volumes could be weak in 1QFY12 as buyers de-stock and Indian
prices will eventually come off by 2Q as cheaper imported steel starts flowing in.
Cost push set to recede, iron ore down 11% from peak
Hard coking coal contract prices have risen to US$330/t in 2QCY11 from US$225/t
in 1QCY11. However, CLSA’s resources team expects prices to gradually correct to
US$275-290/t in 2HCY11 as Australian supplies recover.
Iron ore prices are down to US$171/t from the mid-Feb peak of US$192/t.
However, prices are not falling further and seem to have stabilized.
Players with captive raw materials still at an advantage
Given the cost-push led up-move in steel prices, companies with captive raw
materials (Tata Steel India, JSPL) will see a sharp margin expansion in 4QFY11,
which should sustain in 1QFY12 to a large extent. However, margins will slide
2QFY12 onwards as raw material as well as steel prices will likely recede.
However, if iron ore prices settle near current levels and coking coal, too, does not
fall much, steel prices will not decline much implying higher margins for companies
with captive raw materials.
Convertors like JSW Steel will also see margins expand near-term but will see a
faster normalization of margins than companies with raw materials by 1QFY12.
Tata Steel and JSPL remain our top picks
Unlike previous up-cycles, steel stocks have not moved up with steel prices in the
last three months. We believe that the market is already looking through the nearterm
margin expansion and is focussing on normalized FY12 margins.
JSPL has outperformed the Sensex by 3% in YTD CY11 while Tata and SAIL have
marginally underperformed by ~3-4%. JSW Steel, however, has underperformed
the index by 16% which signals market preference for integrated players.
Our estimates already build in a steel price correction from current levels. We have
assumed an Asian HRC price at US$700/t for FY12 compared to current price of
US$730/t and North Europe HRC at US$800/t versus current price of US$896/t.
We prefer stock with strong company-specific triggers. Our top picks are Tata Steel
(BUY) and JSPL (BUY). Both companies have large expansions due in 1HCY12, have
low cost advantages and are trading at reasonable valuations on FY13 earnings.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Steel prices peaking
Global steel prices have risen by ~25% since Dec-10 as buyers started
stocking up ahead of cost push. However, prices seem to have peaked in
Mar-11 - earlier than expected – and look set to decline over 2QCY11 as
buyers enter de-stocking mode and costs recede. The decline in prices
might not be much though, given that iron ore prices have stabilized at
fairly high levels. Unlike previous up-cycles, steel stocks have actually
come off in the current up-cycle and hence might not decline much when
prices weaken in 2Q. Overall, steel prices continue to move in ‘minicycles’
and we don’t expect a sustained improvement in convertor
margins unless global utilization levels improve, which needs a broader
economic revival. In this context, company specific triggers continue to
underpin our investment thesis. Tata Steel & JSPL remain top picks.
Steel prices have peaked earlier than expected
Steel prices are up ~25% since Dec-10 as steel buyers started stocking up ahead
of the anticipated cost push in 1HCY11.
Asian HRC prices are at US$730/t in Mar-11, up 21% from Dec-10. N. Europe
prices are at US$896/t, up 29% while Indian prices are up by ~US$120/t.
We had expected steel prices to peak in Apr-May and then correct by mid-CY11 as
buyers enter into destocking phase and raw material prices recede.
However, steel prices appear to have peaked in Mar itself and are already showing
signs of weakness. Asian HRC is already down 2% from the peak. There is news
that Japanese/Korean export prices have come off too. European steel prices are
still strong but volumes are thin and buyers remain on the sidelines.
Indian producers might hold on to prices for a bit longer even while Asian prices
decline. However, volumes could be weak in 1QFY12 as buyers de-stock and Indian
prices will eventually come off by 2Q as cheaper imported steel starts flowing in.
Cost push set to recede, iron ore down 11% from peak
Hard coking coal contract prices have risen to US$330/t in 2QCY11 from US$225/t
in 1QCY11. However, CLSA’s resources team expects prices to gradually correct to
US$275-290/t in 2HCY11 as Australian supplies recover.
Iron ore prices are down to US$171/t from the mid-Feb peak of US$192/t.
However, prices are not falling further and seem to have stabilized.
Players with captive raw materials still at an advantage
Given the cost-push led up-move in steel prices, companies with captive raw
materials (Tata Steel India, JSPL) will see a sharp margin expansion in 4QFY11,
which should sustain in 1QFY12 to a large extent. However, margins will slide
2QFY12 onwards as raw material as well as steel prices will likely recede.
However, if iron ore prices settle near current levels and coking coal, too, does not
fall much, steel prices will not decline much implying higher margins for companies
with captive raw materials.
Convertors like JSW Steel will also see margins expand near-term but will see a
faster normalization of margins than companies with raw materials by 1QFY12.
Tata Steel and JSPL remain our top picks
Unlike previous up-cycles, steel stocks have not moved up with steel prices in the
last three months. We believe that the market is already looking through the nearterm
margin expansion and is focussing on normalized FY12 margins.
JSPL has outperformed the Sensex by 3% in YTD CY11 while Tata and SAIL have
marginally underperformed by ~3-4%. JSW Steel, however, has underperformed
the index by 16% which signals market preference for integrated players.
Our estimates already build in a steel price correction from current levels. We have
assumed an Asian HRC price at US$700/t for FY12 compared to current price of
US$730/t and North Europe HRC at US$800/t versus current price of US$896/t.
We prefer stock with strong company-specific triggers. Our top picks are Tata Steel
(BUY) and JSPL (BUY). Both companies have large expansions due in 1HCY12, have
low cost advantages and are trading at reasonable valuations on FY13 earnings.
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