|Company||CMP (23 Apr)||52-Week Low||Returns from Low||Returns YTD|
|Jindal Steel Power||Rs436.00||Rs78.25||457.19%||63.60%|
One thing is clear; not only have steel stocks outperformed the Nifty from the lows, but have also vastly outperformed the Nifty in 2021. Steel stocks have been the pick among large cap stocks on the NSE giving 3.5 times to 5 times returns from the yearly lows. What exactly is the steel story and what is making Indian steel stocks so special?
India is a force to reckon in global steel
Just a decade ago, India ranked eighth in terms of steel output. In the last couple of years, India emerged as the second largest steel producer in the world, next only to China. Of course, China dominates global steel industry with 55% market share, but that is one side of the story. Over the last few years, India has overtaken erstwhile steel leaders like Japan, South Korea, the US and Russia to emerge second only to China in steel output.
The second aspect is growth slack in 2020. Among the top-10 producers, China, Russia, Turkey and Iran saw positive growth in steel production in 2020. However, India, Japan, South Korea and the US saw contraction in steel output due to the pandemic. That leaves Indian steel industry with a lot of output slack, to capitalize on the GDP recovery expected in 2021 and 2022.
What is biting China is helping India
In the last six months since November 2020, two factors favoured Indian steel companies. Firstly, robust demand came from a sharp recovery in expected GDP. This demand is likely to be robust in India and abroad. Secondly, global steel prices have been on an uptrend since the China recovery story took shape. However, Indian steel prices have not gone up to that extent leaving more headroom for steel prices. But neither factor would have worked if China manufactured steel at full capacity. What exactly is biting Chinese steel?
China is facing severe steel supply curbs domestically. Beijing is targeting zero emissions over time and boosting EAF output from 12% to 20% by 2025. That means two things for India. Firstly, it opens the Chinese steel export market in Asia to Indian steel companies. Secondly, Chinese environmental curbs are likely to push up the cost of steel production in China. Hence the problem of China dumping cheap steel into India may take a back seat.
Indian steel industry in a pricing sweet spot
The curbs on Chinese steel production, reduced risk of dumping and absence of any fresh steel capacity in India mean two things. The demand for steel is likely to remain robust enough to absorb supply and the prices of steel are likely to remain buoyant. Indian steel prices are still below global benchmarks, so there is headroom for steel companies to raise prices further. Hence Indian steel companies could get into a virtuous cycle of robust demand, limited supply and pricing power.
Brokers like JP Morgan have highlighted that domestic steel prices are still quoting at around Rs.59,000/ton compared to the landed price of Rs.75,000/ton. That is a lot of leeway for Indian steel companies to raise prices further. It is this hope that is keeping steel demand robust and prices buoyant. It is estimated that better realizations will enhance capacity utilization leading to better economies of scale and sustained profits due to better absorption of fixed costs.
What will drive steel demand in 2021?
Which segments will drive steel demand in India?
In terms of domestic steel demand, construction and railways account for 70% of steel demand and both expect a major investment thrust in the post-COVID scenario. The question mark is over automobiles and capital goods where there are capital cycle concerns. The big thrust for steel demand could come as Indian GDP moves from -8% to +11% in the next 1 year.
The price advantage of Indian steel is also making it attractive for exports. In FY21, export of finished steel stood at 10.79MT, 29% higher over FY20. At the same time, steel imports were 30% lower yoy, making steel a surplus export commodity. Apart from China, India also boosted steel exports to Italy, Belgium and Spain. For the first time in FY21, India reported 6.03MT net steel trade surplus.
In short, the domestic and export demand is there, price advantage is there and Chinese dumping is no longer an issue. What remains to be seen is how much of this sweet spot translates into better prices and better profits for steel companies.