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India Steel
Analyzing steel export-import data highlights no easy
way out from FLATS over capacity
Entering surplus zone, particularly in flat steel: In our view India has entered
a period of over capacity in steel, with the capacity impact to be felt over the
next few quarters. Capacity additions of c.5MT in longs and c.16MT in flats is
expected by mid CY12E, when FY11 consumption stood at 31MT in longs and
33MT in flats implying far larger capacity build out in flats. This comes at a
time of weakening demand. This has led to expectations of import substitution
in flats as well as increasing exports (India was a net exporter in April)
India’s flat steel imports- A combination of price sensitive imports and
higher grades: Flat steel accounted for 91% of India's 5.9MT imports. Of this,
Plates (13%), HR Coils (39%) and CR (19%) account for a large part of the
gross imports. Analyzing the country and value wide data, imports from Japan
and Korea are at significant premium to import/mt values from Russia/China,
implying imports from Korea/Japan are essentially value added steel and hence
not likely substitutable from the domestic market. Imports from these
countries (which are steel plates, HR/CR) stood at c.1.5MT (~25% of FY11
imports) and in our view for a large part are not substitutable.
The remaining IS substitutable, but would require domestic prices to
MOVE to a SIGNIFICANT DISCOUNT: We estimate 'commodity grade’ flat
steel imports in FY11 stood at c.4MT (mainly in HR and CR). However we
believe that replacing this would not be easy, as a large part of these imports, in
our view are driven by pricing arbitrage (domestic v/s imported prices) and
would need domestic prices to remain significantly below imported prices. We
maintain our view that domestic HRC prices need to move towards EXPORT
PARITY model v/s previously IMPORT PARITY. The difference as per our
calculations is $60-80/MT on commodity grades. Higher import tariffs would
obviously be a positive.
But can companies export out their over capacity “profitably”? Not so easy
in our view: Import substitution can take place via lower prices (and this has
happened over the last few months in our view), but it would not be enough in a
period of weak domestic demand. Exports have increased over the last few
months. However, given globally we are in an era of surplus capacity in most
markets and regions, sustained high level of exports are difficult. As of now
exports are less profitable than domestic sales in our view even after including
the Rs850-900 (~$20/MT) DEPB benefits. Given the Chinese over capacity, we
believe sustained high level of exports out of India are not likely
From a net importer to a net exporter can provide 4-5MT of additional demand
for Indian flat steel producers (~25% of new capacity) but we do not expect this
to be an easy and likely lower margin.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Steel
Analyzing steel export-import data highlights no easy
way out from FLATS over capacity
Entering surplus zone, particularly in flat steel: In our view India has entered
a period of over capacity in steel, with the capacity impact to be felt over the
next few quarters. Capacity additions of c.5MT in longs and c.16MT in flats is
expected by mid CY12E, when FY11 consumption stood at 31MT in longs and
33MT in flats implying far larger capacity build out in flats. This comes at a
time of weakening demand. This has led to expectations of import substitution
in flats as well as increasing exports (India was a net exporter in April)
India’s flat steel imports- A combination of price sensitive imports and
higher grades: Flat steel accounted for 91% of India's 5.9MT imports. Of this,
Plates (13%), HR Coils (39%) and CR (19%) account for a large part of the
gross imports. Analyzing the country and value wide data, imports from Japan
and Korea are at significant premium to import/mt values from Russia/China,
implying imports from Korea/Japan are essentially value added steel and hence
not likely substitutable from the domestic market. Imports from these
countries (which are steel plates, HR/CR) stood at c.1.5MT (~25% of FY11
imports) and in our view for a large part are not substitutable.
The remaining IS substitutable, but would require domestic prices to
MOVE to a SIGNIFICANT DISCOUNT: We estimate 'commodity grade’ flat
steel imports in FY11 stood at c.4MT (mainly in HR and CR). However we
believe that replacing this would not be easy, as a large part of these imports, in
our view are driven by pricing arbitrage (domestic v/s imported prices) and
would need domestic prices to remain significantly below imported prices. We
maintain our view that domestic HRC prices need to move towards EXPORT
PARITY model v/s previously IMPORT PARITY. The difference as per our
calculations is $60-80/MT on commodity grades. Higher import tariffs would
obviously be a positive.
But can companies export out their over capacity “profitably”? Not so easy
in our view: Import substitution can take place via lower prices (and this has
happened over the last few months in our view), but it would not be enough in a
period of weak domestic demand. Exports have increased over the last few
months. However, given globally we are in an era of surplus capacity in most
markets and regions, sustained high level of exports are difficult. As of now
exports are less profitable than domestic sales in our view even after including
the Rs850-900 (~$20/MT) DEPB benefits. Given the Chinese over capacity, we
believe sustained high level of exports out of India are not likely
From a net importer to a net exporter can provide 4-5MT of additional demand
for Indian flat steel producers (~25% of new capacity) but we do not expect this
to be an easy and likely lower margin.
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