Nifty99000 100%

Sensex99000 100%


Steel Prices Set For Marginal Recovery

Author: Dasari Sreenivasa Rao/Wednesday, September 2, 2020/Categories: Exclusive

Rate this article:
Steel Prices Set For Marginal Recovery

India’s domestic steel prices may see some recovery after the world’s most stringent lockdown, which brought entire industrial operations to a standstill that hammered down the prices. Now, the domestic demand is on revival path with the rural economy taking the lead. The manufacturing and infrastructure works on a roll again thanks to the Unlock 3.0. With Unlock 4.0 kicking in, metro rail and other services will be open from September 7 onwards. However, the recovery is expected to remain subdued due to the slow migration of workers.

The Indian steel industry produces around 60 per cent long steel products and 40 per cent flat products, according to Indian Commodity Exchange (ICEX). Steel Long futures (Sept 4 expiry) price was hovering at Rs32,600/10MT on ICEX.

Ravinder Kumar, research associate (commodities) at SMC Global Securities Ltd, said: “With some relaxation in lockdown, we have seen some good recovery and manufacturing facilities are running at almost full capacity. This decline is largely driven by plummeting automaker demand, and weakness in construction, infrastructure, and shipbuilding. In my view, all manufacturing and construction activities since July resumed and prices may see an upward trajectory. The price trend showed some recovery in the month of August and hit a high of Rs33500. According to the price action, it expected that prices would continue to trade in a wider range of Rs27,000-34,000. Another scenario indicates that if prices break and sustain above the Rs34,000 then it may target Rs35,200, whereas if it failed to sustain above the mentioned level then we may witness selling pressure which takes the bearish rally towards Rs27,100.”

Fitch Ratings made a forecast on India’s steel demand saying it would contract in FY21. However, the ratings agency said that volumes should continue to improve over the next few quarters, led by rural consumption and government spending on infrastructure, and lead to better margins due to operating leverage.

“Overall fundamentals have been improved for the steel industry. We might witness gradual recovery in the coming few months and also technical charts dictating the same. From an investor perspective, we should wait for a dip towards support level and from there we can create long positions for a longer horizon,” remarked Kumar. 

The EBITDA of Indian steelmakers JSW Steel and Tata Steel may improve from the second quarter of FY21 driven by higher volumes and wide margins.

“EBITDA should improve for Indian steelmakers JSW Steel Limited and Tata Steel Limited from the second quarter of the financial year ending March 2021 driven by higher volumes and wide margins, after a sharp fall in earnings in 1QFY21. The EBITDA drop was less than expected as steelmakers partly offset the sharp demand contraction in India with higher exports. However, we expect leverage to remain higher than is consistent with the ratings for the two companies in FY21. We forecast a sharp leverage decline in FY22 but demand-side risks remain, albeit receding,” Fitch said in its statement. 

According to a report by the World Steel Association (WSA), India’s steel demand is likely to witness a sharp decline of 18 per cent in 2020, whereas it expected that the global steel demand contract to about six per cent dropping to 1,654 million mainly because of Covid lockdown. It is expected that India’s demand is likely to rebound by 15 per cent in 2021 as 2020 is almost over and construction activity was halted entirely from the last week of March, and recovery is expected to remain subdued due to the slow migration of workers.

Kumar further stated that “the slower demand recovery will hit the steel-consuming industrial verticals such as the automotive and machinery sectors. India is the second-largest producer of crude steel globally, with annual production levels at around 110.9 million tonnes (MT) in the year ended March 31, 2019. Though the data is not so supportive so far, it is expected to improve with so many infrastructure projects on roll.”

China is the largest producer of steel, with 51.3 per cent of the global supplies originating from the country. India is a distant second with a 5.9 per cent contribution to the global steel market. As India allows for 100 per cent FDI in the steel industry, huge investments are expected from the leading foreign countries. It is important to mention that FDI in steel was pegged at 0.4 per cent of the GDP in India. With the government introducing policy level initiatives like Make in India and the National Steel Policy, the future bodes well for the metal.

Market participants are trying to catch the attention of the government to cut the taxes to give more strength to this sector. Indian steel manufacturers bear multiple local taxes -electricity and cross subsidy duties, clean energy Cess and royalties -on ore and there are more. These taxes make up 12 per cent of the price of steel. In rival markets, these levies either do not exist or are comparatively lower.

Global demand: According to the report of the World Steel Association, the steel production for the 64 countries was 152.694MT in July 2020 as compared to a decrease of 2.5 per cent in July 2019. China registered a 9.1 percent YoY growth in its steel output at 93.359MT during July 2020. The production of steel in June 2020 at 5.9 MT, was up 15.6 per cent, when compared to 5.1 MT in May 2020, but on an annual basis, the output declined by 26.3 per cent.

“Higher prices supported by the price rebound in China should also drive margins in 2QFY21 and beyond. Hot-rolled steel sheet prices in China have improved by around $100/metric tonne (mt) since April 2020, and Indian prices have started to tick up since late July, with a lag,” said Fitch Ratings.

The writer is a business journalist with 27 years of experience


Number of views (203)/Comments (0)

Leave a comment

Add comment



Ask the Finapolis.

I'm not a robot
Dharmendra Satpathy
Col. Sanjeev Govila (retd)
Hum Fauji Investments
The Finapolis' expert answers your queries on investments, taxation and personal finance. Want advice? Submit your Question above



The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

Subscribe For Free

Get the e-paper free