Steel stocks had corrected a bit between mid-May and mid-June, but since then, they are back near record highs. Tata Steel Ltd scaled fresh highs on Monday. Earlier, there were some concerns of steel demand getting impacted by the second covid wave and related lockdowns. There were also some concerns on realizations based on regulatory commentary on higher commodity prices by China and talk of action to curtail speculation.
Nevertheless, domestic realizations have continued to improve and analysts are expecting a strong performance by steel manufacturers in Q1. “Led by a sharp increase in steel prices, we expect Ebitda of our coverage universe to grow 6% sequentially,” said analysts at Prabhudas Lilladher Research.
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Steel realizations are expected to increase 12% sequentially (by ₹6,730 a tonne). This is likely to take care of rising costs such as those of coal and iron ore. Iron ore prices have continued to rise with firm international and domestic demand, and coal prices are also rising. Domestic realizations improved as average prices of flat products spiked 19% sequentially during Q1. Even prices of long and semi-finished steel products surged 8% and 10% sequentially, respectively, according to analysts at Elara Securities (India) Pvt. Ltd.
However, the sales volumes reported by the steelmakers may decline sequentially, even as they resort to higher exports to take care of declining domestic sales. Export realizations remained strong, with global steel prices being firm.
Overall, analysts at Elara expect the steel companies’ Ebitda per tonne to move up ₹14,500-27,000 year-on-year and ₹800-5,500 per tonne sequentially.
Tata Steel continues to lead the pack with maximum improvement expected in operating profits. The firm is an integrated manufacturer of steel and remains largely insulated from rising raw material costs. Its portfolio also remains skewed towards higher flat products production, which is seeing the highest improvement in demand and prices.
The company’s European operations are also expected to benefit from a strong rebound in steel demand post easing of pandemic-related restrictions.
Steel Authority of India Ltd may also see benefits accrue from its integrated operations, while other firms, including Jindal Steel and Power Ltd and JSW Steel Ltd, are expected to benefit from debt reduction due to the significant improvement in free cash flows.
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