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Metals & Mining
India
Steel major announces price increase—positive for steel equities. SAIL has
announced Rs1,000/ton (US$22/ton) increase in long and flat products; we expect
others to follow suit. Unlike earlier price revision, this appears to be sustainable noting
(1) cost-push driven increase in steel prices globally over the past few weeks, (2) likely
seasonal improvement in demand and restocking, and (3) alignment of domestic steel
prices with the landed costs of imports. We expect companies with captive raw
materials to benefit; Tata Steel will be the biggest beneficiary, in our view.
SAIL announces increase of Rs1,000/ton across different product categories
SAIL has announced Rs1,000/ton price increase across long and flat products. We expect other
Indian steel mills to follow suit. We believe that the domestic HRC prices will probably increase to
Rs32.5-33K/ton from Rs31.5-32K/ton earlier. Exhibit 1 tracks the changes to HRC prices over the
last one year. Unlike the price increase announced in October 2010, which was largely rolled back
in November, we expect steel price hike to sustain.
Steel price increase—room for some more
A number of domestic and global factors have driven the price increase, in our view. Likely
seasonal uptick in demand, restocking and cost-push have driven increase in steel prices globally.
We note that spot iron ore prices are firm at US$175 (China CFR, 63% India fines) and above
1Q2011 contract prices. Scrap prices (FOB Rotterdam) has also increased by 19% in the last one
month. We estimate cost of producing HRC for non-integrated players at US$655/ton at
1Q2011 contract iron ore and coking coal prices; this, in our view, will be approximately 25% of
the global production. As against that, export offers from China and CIS stand at US$625/ton and
US$635/ton on FOB basis. We believe that steel price has room for further increase.
We also note that domestic HRC prices were at a marginal discount to landed costs as opposed to
marginal premium historically. Domestic steel prices after the revision is at parity with landed cost
of imports. Note, our FY2012E estimates for steel companies are based on HRC prices of
US$730/ton, similar to current prices but with a significantly lower scrap and iron ore price
assumption.
Strong play on volume growth; reiterate Attractive coverage view
Indian metal stocks are a strong play on volumes; we forecast volume growth of 20-30% from
FY2012-13E for the India business of the metals sector. More important, volume growth will be
profitable since most of the capacity expansion has raw material integration. Indian metal stocks
have gone up by 6.8% and outperformed the broader market by 3.7% over the last one month.
While most of the stocks are approaching our fair valuation; we highlight that (1) our estimates
are based on conservative commodity price assumptions. Exhibit 4 compares spot commodity
prices versus our forecast, and (2) our valuations do not include value accretion from projects that
may commence production in late FY2012E and early FY2013E. We prefer integrated players that
may benefit from any cost-push driven commodity price increase. Tata Steel is our top pick in the
steel sector.
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