Domestic steel prices are witnessing a correction, with steel mills announcing Rs1,000-1,500/ton price cuts for July 2024. Downtrending regional prices implies domestic prices at a 6-7% premium to import parity and suggests that price weakness should persist. Domestic iron prices, despite NMDC's recent cut, remain at a significant premium to export parity; we expect further price cuts. Muted prices and costs suggest that steel margins should remain subdued in 1HFY25. Amid weak iron ore prices, we prefer non-integrated steel producers (JSP, JSTL) over TATA, SAIL and NMDC in the ferrous space.
Domestic steel prices-downtrend to continue amid premium to import parity
Average domestic HRC/rebar prices were flat/9% qoq in 1QFY25; however, in July 2024, there was a correction, with prices down 2%/4% mom. Chinese export prices continue to trend downward with HRC at US$515/ton, (-)3% mom. Weak domestic demand in China is driving prices lower and exports higher in the absence of supply cuts. India's domestic prices are now at a 6-7% premium to import parity versus parity in March 2024, led by strong domestic demand and lower supply on maintenance shutdowns at domestic mills. Domestic steel demand remains robust at ~13% in 2MFY25. India has turned a marginal net importer in 2MFY25 due to weak exports amid regional competition and higher imports on premium domestic prices. However, we see a weak case of an increase in trade barriers, as absolute net import volumes are still low at <0.4 mn tons in 2MFY25.
Raw materials: Weak iron ore and rangebound coking coal
The seaborne iron ore price is trading at US$105-110/ton since the past few months, led by a record high inventory at Chinese ports, notwithstanding weaker supply. We expect prices to remain subdued, led by (1) weak Chinese steel demand in the absence of a substantial stimulus, (2) elevated port inventory at ~149 mn tons-30% CYTD24 and (3) risk to steel production cuts due to persistent negative margins. NMDC has cut its prices by 9% from July 2024. Domestic iron ore prices are still at a 27% premium to export parity and we expect further cuts. For coking coal, a recent fire at the Grosvenor mine is supporting prices in an otherwise weak demand environment.
Prefer non-integrated companies-JSPL and JSTL over SAIL, NMDC and TATA
We expect 1QFY25E to be a mixed bag for steel companies, with rangebound margins for JSTL and TATA, along with price-led margin recovery for JSP and SAIL, led by a higher long product mix. Downtrending steel prices, seasonal headwinds and rangebound coking coal prices should keep margins under pressure for integrated steel producers, whereas lower iron ore prices should ease some cost pressure for non-integrated producers in 2QFY25E. We find better risk-reward in non-integrated steel producers such as JSP/JSTL over integrated producers such as SAIL, TATA and NMDC. JSPL remains our top BUY, whereas SAIL and NMDC remain our top SELLs. |
