Chinese prod cut awaited amid weak demand in Indian Steel industry: IIFL Capital Services

20 Jul 2023 , 10:36 AM

Indian HRC prices saw a small hike in early July after falling steadily over past six months. But prices are still at a premium to landed cost for imports. In analysts of IIFL Capital Services view, with Chinese RE and industrial led steel demand remaining weak, key would be implementation of production cuts to cap 2023 production at 2022 levels. This would also lower pressure from elevated Chinese exports. Profitability for domestic players would still be better in Q2 (QoQ) as gains from lower coking coal price flows through. Among the ferrous names under coverage, analysts of IIFL Capital Services continue to prefer JSPL and Tata Steel.

Chinese production cuts and lower exports awaited: 

Amid continued weakness in Chinese real estate with new starts down ~30% in Jun-23, and industrial activity moderating after a spike, steel production at 91mt and exports at 7.5mt in Jun-23 continue to impact steel prices and profitability. Incrementally, even as wait for govt stimulus continues, key would be fall in steel production in H2 with plan of capping 2023 production at 2022 levels of 1010m tonnes. This would translate into monthly run rate of 80m tonnes in H2 vs 91m tonnes production seen in Jun-23 and would likely lower pressure from exports.

Indian HRC profitability healthy; steel prices see first small hike: 

Indian HRC prices saw a first increase of ~Rs100/t in early Jul23 after falling steadily through H1CY23. Prices still are at a premium to landed price for imports. Despite the fall, spot spreads have seen an improvement driven by fall in both coking coal prices and iron ore prices and should reflect in results from Q2FY24 onwards. Longs prices have corrected much more though given the lean season and sharp fall in thermal coal prices and e-auction premiums which has lowered costs for secondary steel players.