Steel sector: Improved domestic balance; imports a risk

~Rs8,000/t premium versus import parity prices and falling coking coal prices, remain a key risk to steel prices in the near term. Analysts at IIFL Capital Services reiterate our neutral stance on the sector (after recent upgrades to Add for Tata Steel, JSPL and SAIL), and upgrade JSTL to Reduce (amid rich valuations). They also upgrade NMDC to Buy, supported by expectation of iron ore price hike after the recent Rs300/t reduction.

Removal of 15% export duty on steel to aid balance

After six months of imposing 15% export duty on steel, the government of India on 19-November-22 has reversed the decision with NIL export duty now applicable on steel exports. Duty imposition, combined with fall in global steel prices, had driven down Indian steel exports from over 1mt/month run rate over January-April, to average of 0.44mt/month over July-October and only 0.36mt in October 2022. Removal of export duty opens up export markets once again; analysts at IIFL Capital Services except some volume diversion to aid domestic demand supply amid production uptick over the second half of FY23.

But premium to import parity prices a key risk

Domestic steel prices currently are at ~Rs8,000/t premium to import parity prices from FTA countries; imports have started to rise as supply chain issues have eased gradually. Combined with softer coking coal prices globally, analysts at IIFL Capital Services see this as a key risk to domestic steel prices. Opening up of exports and second half being traditionally strong in terms of demand – would need to offset the pressure from imports, in order to sustain profitability for domestic steel players.

Iron ore and Pellet prices to benefit

Iron ore and pellet prices had weakened sharply, post imposition of the 50% export duty. Removal should support demand and domestic prices, albeit moderated by weak outlook globally. IIFL Capital Services upgraded NMDC to Buy.