New Delhi, Aug 15 (IANS) The Indian steel sector is in a sweet spot with a V-shaped margin recovery ahead, Kotak Institutional Equities has said in a report.
According to the brokerage, domestic steel prices have increased by Rs 3,000 per tonne or 8% from June 2020-end in line with regional prices while the export dependence of steel producers is gradually reducing with recovery in domestic demand.
“Higher prices and favourable geographic shift would aid blended realisations,” it said in its report on metal and mining sectors.
Domestic iron prices have remained subdued relative to regional prices whereas coking coal price reduction would accrue in 2QFY21E.
“We see a sharp margin recovery in 2QFY21E, ahead of the seasonal (second half) demand tailwinds,” KIE said.
Domestic steel demand declined 57% yoy in 1QFY21 due to Covid-19 but is recovering gradually, with July 2020 demand down 29% yoy. Primary steel producers have promptly raised exports with annual run-rate of 15.4 million tonne in June 2020 and now declining gradually with July 2020 run-rate at 13 million tonne.
This trend is expected to continue as steel producers have further reduced the future export allocation on expected recovery in domestic demand. Export prices are 10-12% lower than domestic realisation and increase in domestic sales will raise blended realisations.
Regional steel prices have also increased by 10-12% in the past one-two months, led by improving demand and iron ore-led cost push.
Japan export HRC prices have increased by 8% in the past one month, whereas China export prices have increased by 6% MoM notwithstanding marginal increase in steel inventory.
Domestic prices are up Rs 3,000/tonne (+8%) in the last 40 days with a hike of Rs 500/1,000/1,500/tonne in early July/late July/early August 2020.
Declining domestic inventory and rising demand have tightened the market and allowed domestic steel companies to increase prices to import parity level, two months ahead of strong seasonality in the second half of fiscal year.
A combination of a strong international iron ore and weak coking coal prices is ideal for Indian steel producers as they benefit from discounted domestic iron ore prices, the report said.
Seaborne iron ore prices at US $120/tonne (CFR China 62% Fe) remain strong led by supply-side issues in Brazil and strong China demand. Domestic iron ore prices have increased by 20% in the past two months but continue to be at record discount (45%) to import parity given domestic oversupply. Coking coal prices corrected by 21% qoq in 1QFY21 and should reflect in 2QFY21.
“We see a sharp V-shaped margin recovery (Rs 3,000-Rs 3,500/tonne qoq) in 2QFY21 led by higher prices, US $25-30/tonne higher domestic and export realisation, lower exports and higher domestic sales and cost tailwinds from coking coal (Rs 1,500/tonne) and operating leverage,” the brokerage report said.