Why are Steel Stocks losing their shine?
Yesterday, the share prices of some major steel companies in India declined, even some stocks have gone to their March 2020 levels. The decline was due to the government’s decision to increase the export duty on crucial steelmaking raw materials like iron ore and pellets.
The export duty on all grades of iron ore has been increased 50 percent from 30 percent earlier.
Further, the government has imposed a 15 per cent export duty on hot-rolled, and cold-rolled steel products from nil earlier. On the import front, the government has cut import duty on some raw materials like PCI, met coal and coking coal.
But, Why did FM do this?
The Indian government has done this to combat the skyrocketing inflation in the country, steel is a crucial raw material for most sectors like automobile, real estate etc. Hence, their prices would depend on the steel prices.
The increase in the export duty would reduce the exports and increase the domestic supply of steel in the country, and hence the steel prices would go down.
Well, the government tried to compensate for it by cutting down on the import duty, but most companies have inventory stock of 1 to 1.5 months and hence its effect would not reflect immediately in the books of these companies.
Also, most analysts believe that the rise in the export duty would not be really helpful in reducing the inflation as they are skeptical if automobile or real estate companies would pass on the lesser prices to their customers.
How will it affect the Steel sector in the long term?
Steel is a cyclical industry, which simply means it is dependent on the economic growth of the country. Steel is used in infrastructure, housing, automobile, therefore, if these sectors grow, steel would also grow.
We produce a lot of steel, we are the second largest producer of steel in the world. Any guesses, who is the first? Yes, It’s China. China accounts for 57% of the world’s steel, but recently to comply with its pledge to go carbon neutral by 2050, it is closing down its polluting steel plants.
Apart from it Russia & Ukraine are some of the largest producers of steel in the world. With sanctions on Russia, Wars in Ukraine and China reducing its exports, India was in the limelight for steel exports.
Therefore, India’s steel exports have been growing and has reached a high at 13.5 million tonne (MT) of finished steel valuing Rs 1 lakh crore in FY22.
Not just the exports, the steel companies were set to rock the Domestic markets aslo, as the government in the recent budget announced spending a whopping Rs.7.5 trillion, towards the infrastructure sector in India.
While everything was going well for the steel companies in India, the government announced the hike of the export duty. Well, the timing wasn’t really great as currently the dollar is at an all time high, people are talking about recession in US, In Europe, due the war the financial condition is weak, there are lockdowns in China, their real estate sector is already in a turmoil, sector the demand for steel is going to take a hit.
On top of that, a major raw material to produce Steel is coking coal, Indian companies are dependent on Australia for 80% of their coking coal needs, the prices of which have skyrocketed in the last few months from $300 a tonne to $700.
High coal prices, coupled with high export duty would squeeze the margins of the steel companies in India.
Also, the current period would have provided India, an opportunity to establish itself a reliable exporter of steel in the world. But with high export duty, the topline as well as margins of these companies would suffer. Accounting for these changes, many brokerage houses have changed their ratings and have shared new target prices for steel companies.
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