STEEL - THE METAL IS SHINING BRIGHT

By Ruma Dubey

Steel. That seems to be the buzzword in the stock markets today. The BSE Sensex Metal index is the biggest single gainer, contributing directly to the jump in the overall indices today. All the 10 stocks in the Metal Index are up in the green, with not a single stock in the decline. Right from large to mid and smallcap; all metal, especially steel stocks are ruling the roost. Jindal Steel and JSW Steel have interchangeably held their place as the top gainer on the Sensex. National Aluminium, Tata Steel, SAIL, Hindalco, VEDL; all are up.

This was a story which was building up for a month now. But the real momentum came in today from China. Hebei, which accounts for about a quarter of China's total steel output, plans to slash 31.86 million tonnes of steel and ironmaking capacity this year. This is  more than double the 14.62 million tonnes of steel capacity that Hebei cut last year. This, the Chinese say is being done to cut down on smog and remove outdated steel capacity. Thus a stable downstream demand and reduced supply bodes well for the steel prices.

China, the world’s largest steel maker has been sitting on huge amounts of excess steel capacity and since last year it has been trying to bring this down. Thus when the world’s largest producer decides to reduce surplus capacity and cuts down production, naturally price of steel will go up. Steel prices, both in India as well as the international markets are up after six long years of losing streak. Riding along with this high ride of steel will be coking coal and iron ore.

Annual construction steel production in China was at 40-50 mtpa and with these production cuts, the production will come down by a straight 20%.

As against this, in India, production is being ramped up. YoY numbers are up but sequentially, December has been very good – QoQ production was up 10.6% while it was a degrowth in November at -10.4% and -2.5% in October. The same trend is seen in consumption too. QoQ, December consumption was up by a good 17% while November had a degrowth of -14.3% and -0.5% in October.

Though many experts say that the price rise which we are currently seeing in steel might not sustain, this new report from China changes it all. Earlier exports were not an option and domestic demand, especially post demonetization was on the slump. The price rise was mainly on account of increase in price of raw material coking coal and then the import duty on exports. But this Chinese production cut changes the story from unsustainable to more than sustainable!

Protectionism for the sector is expected to continue. The Minimum Import Price (MIP) extended by the Govt of India expires on 4^th Feb. 28% of the NPAs seen in the India banking sector comes from the steel sector thus some hand holding might continue though capital goods makers have urged the Govt to cut down the import duty on steel while the steel minister, in turn, has asked for cut in import duty on coking coal and nickel. If the duty on raw materials is brought down, duty on steel might also come down and that in turn could bring about a correction in the price. But if China increases its captive consumption as supply is cut back, prices will remain firm despite all other factors.

Domestic demand will come in only after conclusion of FY17. Sops are expected for infra build and affordable housing. If these do happen, then demand within will also rise. Auto and auto ancillary sectors are also take off in FY18.

Thus outlook for the metal sector does look bright; at least from the current vantage point at which we are in currently. Prakash Industries, Sunflag, NMDC and Sarda Energy recommended by our Editor, Mr.SP Tulsian remain best picks in the metal sector for the long term.