After the lockdown was partially lifted, Indian steel companies’ production recovered in June. Still, that might not suffice to pull the sector out of the woods just yet, as production for the year will remain well below par. As such, the improvement in steel stocks, seen in the past few weeks, could taper off.
India’s steel production in the first quarter fell 53% year-on-year (y-o-y). While production improved in June over May, the overall impact of the lockdown in the first quarter is high. However, some companies have lately reported higher utilisation.
Export growth, which was a saving grace, may taper off in the coming quarters. Besides, export prices slipped slightly lower. Further, analysts note that the quality of exports is tilted toward low-margin products. Besides, export growth could taper off in the coming quarters as overseas demand may turn soft.
“Avenues to export come under pressure as 1) China steel demand is likely to wane due to seasonal rains/floods, and slowing construction; 2) the EU modifies steel safeguard measures to country-specific quarterly quotas as countries exhausted full-year quotas in the first few months," said analysts at JM Financial Institutional Equities in a note to clients.
Consumption continues to remain soft. Domestic consumption declined 57% y-o-y in Q1, which is a big worry. Inventory of finished steel remains high even though it is marginally lower from May. This is expected to weigh on sales in the coming quarters. Some improvement in domestic demand could be attributed to the rural sector. Though, a broad-based pickup remains elusive.
“In our view, lacklustre domestic demand is a key concern for steel prices. In the past seven weeks, relatively robust international prices did not have a run-on impact as domestic demand is weak. Furthermore, cost push is absent in the domestic market as coking coal price has come off and domestic iron ore price is down 30% from three months ago," said analysts at Edelweiss Securities in a note to clients.
Metals stocks have been on an upswing recently. The Nifty Metals index gained about 2.5% on Monday. With production and demand likely to be soft, the run-up in share prices of metal stocks seems to be a step out of sync with growth.
Source :- Livemint.com