Welekar says Axis has a negative outlook on steel stocks. They have a ‘hold’ rating on Tata Steel and SAIL. They are positive on non-ferrous names and have a buy on Hindalco. On Nalco, again they we have maintained ‘hold’.
What do you make of the statements coming in from the steel minister and do you think if the import duty is increased from 7.5% to 10-12%, it would be enough to boost domestic consumption?
Aditya Welekar: At current spot prices, if we look at import parity, the domestic HRC prices are trading at almost a 8% premium to Chinese steel prices. If they increase the duties from 7.5% to 12%, then that premium falls to almost 4%. But even if they increase the duty from 7.5% to 12%, Indian HRC prices, steel trade at a premium of 4% to the Chinese prices. So, it will be a helpful and sentimentally positive step. But given the quantum of fall in Chinese HRC prices, the Indian domestic steel prices will still be at 4% premium even after increasing the duty from 7.5% to 12%. That is the back-of-the-envelope calculation we have done.
The recent channel checks indicated that JSW Steel had increased the prices by around Rs 750 to Rs 1000 per tonne. But if it is true that China has been dumping steel at lower prices and demand is not that great, then how are companies getting this confidence to increase the prices?
Aditya Welekar: There might be a slight relief in the steel sector post this monsoon. Once the monsoon is over, there might be some pickup in prices. Domestically. the steel industry seems strong. So in the first four months of this fiscal year, 15% domestic steel growth is there and post this monsoon, there might be some pickup in the construction activities. Based on that, some of the steel mills have taken some price hikes.
But if China continues to dump, then the pressure on the domestic steel prices will continue and that will put upward pressure on these domestic steel mills to increase any further steel price hikes. Ultimately, the positive demand or positive trigger should happen in China and if that happens, means post the monsoon if there is some pickup in industrial activity in China, then that will be a key positive trigger for the sector and so far we have seen that that trigger is yet to happen.
The recent PMI prints from China are in the contraction zone at 49.1, which is below 50. So, we have to wait and watch post this monsoon how the Chinese construction activity picks up. So far, there are no indications of any stimulus from China. Overall, the outlook is uncertain and slightly on the negative side.
On the one side, China has been dumping steel at lower prices in the country. On the other side, raw metal prices for steel companies have been falling. What kind of headroom might these steel companies have at this moment to compete with the Chinese products?
Aditya Welekar: If we look at the domestic steel players, in the second quarter of this fiscal year, we might see some contraction in steel spreads because of this fall in HRC prices, partially offset by the decline in the coking coal and iron ore prices. What we can make sense of the spot steel spreads are still down if we compare it on a month-on-month basis so that will translate to lower spreads in the second quarter of this fiscal. So, the upside trigger or the relief for the steel mills will only happen if there is some increase in the pickup in activities in Chinese steel prices as I said earlier. So, the fall in iron ore and coking coal will be more beneficial for non-integrated steel players like JSPL and JSW Steel. Coking coal is now below 200 and iron ore is now below 100 so that is providing some relief to steel spot spreads. But the HRC prices are down. So, overall, the spot spreads are down.Given the fact you are talking about the headwinds from the demand from China, etc, and the dollar index being very volatile, what is your final pecking order on the equities and the stocks? Is there any fresh recommendation of ‘buy’ or are most of them ‘sell’ right now? What is your recommendation on the individual names?
Aditya Welekar: We have a negative outlook on steel stocks. We have a hold rating on Tata Steel and SAIL. We are positive on non-ferrous names like Hindalco, where we have maintained our ‘buy’ rating. On Nalco, we have maintained ‘hold’ because the smelters at Nalco are already operating at peak capacity.