Article

Will Steel Sector Continue to Improve?

09 Apr 2021 Nikita Bhoota

Continued strong demand in China, along with supply cut in Tangshan, has supported the surge in global steel prices and spreads. Enhanced focus on emissions from steel (in China) along with incremental infra-led demand in USA bodes well for steel prices at the margin, over the medium term.

Chinese steel prices continue to strengthen on multiple triggers:
After witnessing some softness in January, Chinese steel demand from the infrastructure, construction, auto and durables sectors has remained strong. This along with supply-related restrictions in Tangshan province and enhanced emissions-focus for steel is supporting higher steel prices. Strong recovery in demand from China would likely sustain over the near term, albeit could gradually taper down during 2021 in our view. This remains the most important monitorable for steel price direction, as the current upcycle was led by strong post-Covid revival in demand across geographies, primarily from China.

2021 supply restrictions positive on the margin:
The local government in Tangshan, in mid-March 2021, directed 23 steel mills to reduce emissions in 2021, via production curbs ranging over 30-50%. Tangshan produced 144mt of steel in 2020; and restrictions could likely lead to ~25-30mt of lower steel output annually, translating into ~3% of annual Chinese steel production.

US infrastructure spend of US$2.2trn, positive at the margin 
US President Joe Biden recently announced a US$2.2trn investment plan, to overhaul and upgrade US infrastructure. This can be a positive for steel demand (discussed ahead), but approval of the plan may see some hiccups, given that funding is through higher corporate taxes. 

The total amount is to be invested over the next eight years, with planned investments in physical infrastructure estimated at ~50% of the total commitment. Physical infra spends are split across transportation infra (roads & bridges, public transit, railways, ports & airports), buildings (schools, affordable housing, hospitals), and water & electric grids. The balance ~50% of total spends is directed towards in-home care, advanced manufacturing, R&D, electric vehicles (infra and incentives), and broadband infra.

India – Healthy steel demand overlays strong global prices 

Indian steel demand is expected to remain healthy in FY22, driven by government push for infrastructure as well as improving economic activity, thus driving demand from the auto, construction, durables, etc sectors. While rising production from secondary players would improve domestic supply, prices would largely follow export parity, given the healthy pricing outlook from China and the US. With an option to export steel at higher realisations for large steel makers, the domestic market is likely to remain tight in the near term. This is expected to keep prices at elevated levels, over most of FY22.

Healthy spreads to drive rapid deleveraging 

Given the strong pricing momentum over the past two quarters, all the three leading domestic steel makers, viz. Tata Steel, JSW Steel and SAIL, have witnessed strong deleveraging in FY21. Limited capex along with strong focus on cash flows by management have supported healthy deleveraging so far. Given the elevated steel prices, we believe there would be some increase in working capital in 4QFY21 as well as 1QFY22. Capex too is witnessing a revival, considering the strong demand visibility. However, healthy spreads would drive further deleveraging over FY22-23.

Stock Performance:
Nifty50 gained marginally 1% between the period March 01,2021- April 08,2021. Here, we have discussed some steel companies’ stocks that have given positive returns or have underperformed the benchmark index Nifty50 in the same period.

 

Company

01-Mar-21

08-Apr-21

Gain/Loss

JSW Steel Ltd.

405.1

614.1

51.6%

Steel Authority Of India Ltd. (SAIL)

78.4

95.6

21.9%

Tata Steel Ltd.

730.4

918.4

25.7%

Source: Ace Equity

The stocks in the steel sector have given superior returns in the past one month. JSW Steel rallied 51.6% from March 01,2021- April 08,2021. Whereas, SAIL and Tata Steel jumped 21.9% and 25.7% respectively in the same period.
 

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Will Steel Sector Continue to Improve?

09 Apr 2021 Nikita Bhoota

Continued strong demand in China, along with supply cut in Tangshan, has supported the surge in global steel prices and spreads. Enhanced focus on emissions from steel (in China) along with incremental infra-led demand in USA bodes well for steel prices at the margin, over the medium term.

Chinese steel prices continue to strengthen on multiple triggers:
After witnessing some softness in January, Chinese steel demand from the infrastructure, construction, auto and durables sectors has remained strong. This along with supply-related restrictions in Tangshan province and enhanced emissions-focus for steel is supporting higher steel prices. Strong recovery in demand from China would likely sustain over the near term, albeit could gradually taper down during 2021 in our view. This remains the most important monitorable for steel price direction, as the current upcycle was led by strong post-Covid revival in demand across geographies, primarily from China.

2021 supply restrictions positive on the margin:
The local government in Tangshan, in mid-March 2021, directed 23 steel mills to reduce emissions in 2021, via production curbs ranging over 30-50%. Tangshan produced 144mt of steel in 2020; and restrictions could likely lead to ~25-30mt of lower steel output annually, translating into ~3% of annual Chinese steel production.

US infrastructure spend of US$2.2trn, positive at the margin 
US President Joe Biden recently announced a US$2.2trn investment plan, to overhaul and upgrade US infrastructure. This can be a positive for steel demand (discussed ahead), but approval of the plan may see some hiccups, given that funding is through higher corporate taxes. 

The total amount is to be invested over the next eight years, with planned investments in physical infrastructure estimated at ~50% of the total commitment. Physical infra spends are split across transportation infra (roads & bridges, public transit, railways, ports & airports), buildings (schools, affordable housing, hospitals), and water & electric grids. The balance ~50% of total spends is directed towards in-home care, advanced manufacturing, R&D, electric vehicles (infra and incentives), and broadband infra.

India – Healthy steel demand overlays strong global prices 

Indian steel demand is expected to remain healthy in FY22, driven by government push for infrastructure as well as improving economic activity, thus driving demand from the auto, construction, durables, etc sectors. While rising production from secondary players would improve domestic supply, prices would largely follow export parity, given the healthy pricing outlook from China and the US. With an option to export steel at higher realisations for large steel makers, the domestic market is likely to remain tight in the near term. This is expected to keep prices at elevated levels, over most of FY22.

Healthy spreads to drive rapid deleveraging 

Given the strong pricing momentum over the past two quarters, all the three leading domestic steel makers, viz. Tata Steel, JSW Steel and SAIL, have witnessed strong deleveraging in FY21. Limited capex along with strong focus on cash flows by management have supported healthy deleveraging so far. Given the elevated steel prices, we believe there would be some increase in working capital in 4QFY21 as well as 1QFY22. Capex too is witnessing a revival, considering the strong demand visibility. However, healthy spreads would drive further deleveraging over FY22-23.

Stock Performance:
Nifty50 gained marginally 1% between the period March 01,2021- April 08,2021. Here, we have discussed some steel companies’ stocks that have given positive returns or have underperformed the benchmark index Nifty50 in the same period.

 

Company

01-Mar-21

08-Apr-21

Gain/Loss

JSW Steel Ltd.

405.1

614.1

51.6%

Steel Authority Of India Ltd. (SAIL)

78.4

95.6

21.9%

Tata Steel Ltd.

730.4

918.4

25.7%

Source: Ace Equity

The stocks in the steel sector have given superior returns in the past one month. JSW Steel rallied 51.6% from March 01,2021- April 08,2021. Whereas, SAIL and Tata Steel jumped 21.9% and 25.7% respectively in the same period.