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India Steel Sector -----------------------------------------------------------------------------------------------
Growth reverting to the pre-2005 single digit trend; Traders suggest a weak CY11
● Steel data from JPC shows FY11 apparent consumption growth
was a mere 3.5%: growth in India is reverting back to low single
digits after five years of mid-teens growth (Fig 1). This has
continued into FY12: after a short-lived recovery in apparent
demand in Feb/Mar, Apr-May saw negative YoY growth (Fig 2).
● Net imports have been marginal in FY12. Apparent cons. uses
production, not shipments: Feb/Mar production was boosted by
high steel prices and low RM costs. Steel inventory thus was high
end-Mar 11. As RM costs rise, production should come off now.
● We also provide key takeaways from steel trader meetings: 1) no
expectations of price hikes this year – they are worried about the
increase in capacity as they don’t see strong demand growth.
● Indian steel no longer enjoys a premium to import price (usually
$50-80): unless global prices rise, little chance of price hikes in
India – weak response to the May hikes taken by Indian firms.
Focus on exports is rising as domestic markets remain weak.
● As the steel industry begins its unwind (fall in RM -> fall in steel ->
destocking), we remain UNDERWEIGHT on steel equities at least
till Aug-11.
Slowdown in apparent consumption in Steel now evident
Steel data from JPC reinforce our view on slowdown in the Indian
market. In FY11, apparent consumption slowed down from mid-teens
growth to just 3.5% (Fig 1). Medium-term growth for India seems to be
reverting back to single-digit growth again – levels last seen pre-2005.
This slowdown seems to be continuing into FY12. The three-month
moving average (3MMA) for apparent demand has been showing M/M
declines since mid-CY10, and turned negative again in May-11.
On a YoY basis, April-May saw a reversal back to the trend seen
since Jul-10 (Fig 2). Note that apparent consumption is net exports +
production and not shipments by companies. Higher production skews
this growth, even if it ends up adding to inventories at the
manufacturers. We believe the pick-up in Feb/Mar was driven by high
steel prices at a time when raw material costs were low. As these
have started to pick-up, production discipline seems to be coming
back – we expect June to have seen weaker production.
Net imports are averaging ~1-1.5 mtpa, better than the net exports
seen in Nov/Dec-10, but still muted. We expect exports to start picking
up as new capacities start to get commissioned.
Key takeaways from meetings with steel traders
We present our key takeaways from meetings with steel traders in
Mumbai whom we met to understand current market dynamics:
● No expectations of price hike this year: While we think it is too
early to take a call on the entire year, some traders believe
markets will remain depressed for a long time. Traders are worried
about the increase in capacity as they don’t see strong demand
growth. Hence probability of price hikes is minimal. The increases
announced in May-11 by a few companies have not really been
implemented; HRC prices are about Rs35,200/t.
● Indian steel premium no longer exists: Indian steel earlier
enjoyed a $50-80/t premium over imports; no longer. Unless
import prices rise, it will be difficult for Indian steelmakers to raise
ASPs. Focus on exports is rising due to weak domestic markets.
We believe that restocking will be delayed due to expectation of 1)
weakness in demand and 2) fall in prices as raw material prices see
correction – expectation of steel price declines can drive further destocking. We call this the “unwinding of the steel value chain”.
In light of these developments and the muted demand growth, we
believe it is still early to buy steel equities. We would stay on the
sidelines at least till Aug-11, when a seasonal restock may start.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Steel Sector -----------------------------------------------------------------------------------------------
Growth reverting to the pre-2005 single digit trend; Traders suggest a weak CY11
● Steel data from JPC shows FY11 apparent consumption growth
was a mere 3.5%: growth in India is reverting back to low single
digits after five years of mid-teens growth (Fig 1). This has
continued into FY12: after a short-lived recovery in apparent
demand in Feb/Mar, Apr-May saw negative YoY growth (Fig 2).
● Net imports have been marginal in FY12. Apparent cons. uses
production, not shipments: Feb/Mar production was boosted by
high steel prices and low RM costs. Steel inventory thus was high
end-Mar 11. As RM costs rise, production should come off now.
● We also provide key takeaways from steel trader meetings: 1) no
expectations of price hikes this year – they are worried about the
increase in capacity as they don’t see strong demand growth.
● Indian steel no longer enjoys a premium to import price (usually
$50-80): unless global prices rise, little chance of price hikes in
India – weak response to the May hikes taken by Indian firms.
Focus on exports is rising as domestic markets remain weak.
● As the steel industry begins its unwind (fall in RM -> fall in steel ->
destocking), we remain UNDERWEIGHT on steel equities at least
till Aug-11.
Slowdown in apparent consumption in Steel now evident
Steel data from JPC reinforce our view on slowdown in the Indian
market. In FY11, apparent consumption slowed down from mid-teens
growth to just 3.5% (Fig 1). Medium-term growth for India seems to be
reverting back to single-digit growth again – levels last seen pre-2005.
This slowdown seems to be continuing into FY12. The three-month
moving average (3MMA) for apparent demand has been showing M/M
declines since mid-CY10, and turned negative again in May-11.
On a YoY basis, April-May saw a reversal back to the trend seen
since Jul-10 (Fig 2). Note that apparent consumption is net exports +
production and not shipments by companies. Higher production skews
this growth, even if it ends up adding to inventories at the
manufacturers. We believe the pick-up in Feb/Mar was driven by high
steel prices at a time when raw material costs were low. As these
have started to pick-up, production discipline seems to be coming
back – we expect June to have seen weaker production.
Net imports are averaging ~1-1.5 mtpa, better than the net exports
seen in Nov/Dec-10, but still muted. We expect exports to start picking
up as new capacities start to get commissioned.
Key takeaways from meetings with steel traders
We present our key takeaways from meetings with steel traders in
Mumbai whom we met to understand current market dynamics:
● No expectations of price hike this year: While we think it is too
early to take a call on the entire year, some traders believe
markets will remain depressed for a long time. Traders are worried
about the increase in capacity as they don’t see strong demand
growth. Hence probability of price hikes is minimal. The increases
announced in May-11 by a few companies have not really been
implemented; HRC prices are about Rs35,200/t.
● Indian steel premium no longer exists: Indian steel earlier
enjoyed a $50-80/t premium over imports; no longer. Unless
import prices rise, it will be difficult for Indian steelmakers to raise
ASPs. Focus on exports is rising due to weak domestic markets.
We believe that restocking will be delayed due to expectation of 1)
weakness in demand and 2) fall in prices as raw material prices see
correction – expectation of steel price declines can drive further destocking. We call this the “unwinding of the steel value chain”.
In light of these developments and the muted demand growth, we
believe it is still early to buy steel equities. We would stay on the
sidelines at least till Aug-11, when a seasonal restock may start.
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