Steel: Cost levers to aid spreads

14 Sep 2023 , 10:36 AM

Domestic steel prices have seen a steady rise through September with HRC at Rs58,100/t supported by healthy demand and are now at ~10% premium to landed cost of imports. Meanwhile, at a run rate of 99mt/yr, Chinese exports remain a concern with production cuts yet to materialise amid weak demand. Even assuming stable steel prices, domestic producers should benefit from a broader correction in RM prices. Additionally, ramp up of captive ore production (iron ore and coal) would also help lower costs despite quoted premiums aided by gains in logistics, BF operations and power & fuel especially for JSPL and also for JSTL. Focus on higher captive production of pellets and coking coal will lower the cost structure incrementally. Analysts of IIFL Securities continue to like JSPL and Tata Steel. 

Domestic steel stronger despite increasing Chinese exports: 

With all large players taking price hikes, domestic HRC prices have risen by ~Rs2,100/t from July to Rs58,100/t through early Sep’23. This is supported by strong domestic steel demand across segments and some disruption for secondary steel producers. Meanwhile, Chinese steel exports continue to be strong at an annualised run rate of ~99mt/yr in Aug’23. Strong supply and weak demand in China have kept HRC prices subdued at US$557/t, with mills continuing to be in losses. Analysts of IIFL Securities continue to await production cuts amid the demand-supply mismatch. 

Cost analysis – structural levers to add to broader fall in costs: 

Cost-structure analysis for the four large domestic steel producers over FY12-23, highlights the extent of impact seen from sharp spike in not only coking coal, but also from thermal coal and other key consumables over FY12-23. Incrementally, these have normalised and will support Ebitda/t despite the lower steel prices. Additionally, strong focus on RM integration (iron ore, coal) will drive savings, especially for JSPL and JSTL despite the mining premiums with logistics and better BF operations providing the offset. Gains would also accrue from captive production of pellets and coking coal across players. Power & fuel costs should also benefit from better and lower-cost domestic coal availability.