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Published: Dec 29, 2021
Updated: Dec 29, 2021

Steel Sector: Boomtime To Continue

The Indian steel sector, in tandem with the global steel scenario, has come out all guns blazing from the shadow of the Covid-19 pandemic. Surprisingly, fiscal 2021, which saw the pandemic ravage both people and businesses worldwide, only served to boost the steel sector’s fortunes, both in terms of consumer demand and skyrocketing share prices.

While the US witnessed the highest jump in steel prices at $1,455 per tonne in April 2021, Indian steel prices in the same period were around $ 821 per tonne. In other words, even if one takes US tariff barriers into account, it is still profitable for Indian steel makers to export to the US.

On the domestic front too, the impact of the pandemic on both production and demand for steel is likely to be marginal. But with surging prices of steel, stocks of steel companies were on fire, reaching unprecedented high levels. The question taking round now is will the boomline sustain?

The Indian stock market has been experiencing a sartorial boom after the Covid-19 pandemic broke out in early 2020. And one of the segments which has benefited the most is the steel sector. Almost all steel stocks have registered a sharp uptick in prices. This boom in steel shares is all the more significant as it comes after a dull and drab five years for the sector.

Tata Steel, the leading steel company in the country, which had no takers even at a low price of Rs 66.90 in September 2001, is now in demand around a range of Rs 1225/1230. JSW Steel, which was considered untouchable at a price of just Rs 1.85 in April 2002, is now a sought-after stock in the range of Rs 695/700 (face value Re 1). Jindal Steel and Power, which had nosedived from an all-time high of Rs 16,780 (before the 5:1 bonus issue) in January 2008 to an all-time low of Rs 48.20 in February 2016, has climbed to Rs 393. Godawari Power and Ispat, which was friendless around Rs 41/42 in February 2009, is going strong today around Rs 1,410 and APL Apollo Tubes has skyrocketed from just Rs 31.50 in March 2009 to Rs 1,425 and is still going strong. SAIL, which was in the dumps around Rs 3.95 in September 2001, is now attracting enquiries in the range of Rs 395-400.

The boomtime in steel shares follows a remarkable spurt in prices of iron ore and steel. With surging demand for steel at the global level during fiscal 2021, as businesses step up production amid an easing of pandemic restrictions, steel makers have consolidated in the past year ended March 2021, allowing them to exert more control over supply. Tariffs like anti-dumping duties on foreign steel imposed by the Trump administration have kept cheaper imports out, and steel prices charted a distinctly upward course. The US led the upsurge in prices. “We are running 24/7 everywhere,” pointed out Lourenco Gonsalves, the Chief Executive of Cleaveland, an Ohio-based steel producer that reported a significant surge in sales during its latest quarter.

U.S. BOOM

Says an observer of the US steel market scenario, “For decades, the story of American steel had been one of job losses, mill closure and the bruising effects of foreign competition. But now the industry is experiencing a comeback that few would have predicted even months ago. Steel prices are at record highs amid an easing of pandemic restrictions. As far as the steel industry is concerned, it is boomtime the world over. Demand for steel is peaking and production is on full stream. In such a boomtime, highly industrialised nations are bound to witness significant progress as the GDP growth rate in China indicates. The US is about to begin heavy investment in the infrastructure sector, which will fast-track the economic recovery there. The economies of Europe and the UK are also opening up.

In line with developing countries, in India downstream steel users, be they in infrastructure or construction, are bound to be impacted by the pandemic and the measures that will become necessary to contain it. Maintains the observer quoted earlier, “In my view, the impact of the pandemic on the steel industry in India too will be marginal. Before the second wave of the pandemic hit India, production and demand of steel were both at a peak. At best, India may have to contend with a mild hit on the demand and production of steel.” In line with global trends, India, during the second half of the Covid-struck fiscal year 2021, saw an unprecedented rally in domestic steel prices. Domestic flat steel-hot rolled coil (HRC) prices shot up 40 per cent since the beginning of the year in April 2020 and prices of long steel-TMT have surged by over 30 per cent by the end of fiscal 2021. Steel prices continued to set new record highs month after month. In the beginning of fiscal 2022 in April 2021, domestic steel players announced a further price hike by up to Rs 1,200-2,000 per tonne in HRC and around Rs 3,000 per tonne in CRC. In April 2021, HRC were being offered at Rs 59,700-60,000 per tonne, up from Rs 36,950 per tonne a year ago. This was the highest level seen since 2008, the year of the disastrous global financial melt-down.

The upswing in domestic steel prices is well supported by the distinctly bullish fervour in global steel prices and the revival in domestic demand for steel. The rally in global steel prices was initially driven single-handedly by China until other large economies like the US and Europe came roaring back to the market armed with stimulus checks which led to demand outpacing supply.

The market that has witnessed the highest jump in steel prices is the US, where the prices of HRC have shot up 160 per cent yoy at $ 1,455 per tonne in April 2021, surpassing the high of $ 1,100 per tonne witnessed in 2008. HRC prices in Western Europe spurted 96 per cent to $ 911 per tonne in April 2021. In China, prices are quoted around $ 725 per tonne, reflecting an uptick of 79 per cent since a year ago. Indian HRC prices at this juncture were around $ 821 per tonne, indicating a 44 per cent drop from steel prices in the US. This means that despite the 25 per cent tariff barrier imposed by former President Donald Trump, it is still attractive to export to the US.

'BOOM WILL STAY'

However, while the spurt in steel prices has in turn buoyed prices of steel stocks, the question making the rounds in trade, industry and market circles is: Will the boomtime continue, and will the high prices of steel stocks be maintained going forward?

Though there are a few sceptics who doubt the sustainability of the boomtime in steel stocks, many analysts and observers strongly believe that the steam in the steel stocks boom is not exhausted as yet. According to an expert, "the upswing in domestic steel prices is well supported by the distinctly bullish fervor in global steel prices and revival in domestic demand for steel." HRC in the US was quoted at $ 1,455 per tonne in April 2021, and is now quoted around $1,500, surpassing the high of $ 1,100 witnessed in 2008. HRC prices in Western Europe and China were quoted at $ 911 and $ 725 per tonne respectively in April 2021.

Indian HRC prices at this juncture were around $ 821 per tonne, so it's little wonder that there has been a spurt in exports of finished steel from India to the tune of 125 per cent in April 2021 yoy and almost double the quantity shipped in February 2021. What is more, exports to European countries like Italy, Belgium and Spain have gathered momentum in the past few months due to higher export realizations.

NET EXPORTER

During fiscal 2021, export of finished steel from India was higher by 29.1 per cent at 10.8 million tonnes as compared to fiscal 2020. The share of exports to Italy rose to 22 per cent in March 2021 from 12 per cent, while the share of exports to Spain and Hong Kong rose to 5 per cent and 10 per cent respectively from just under 1 per cent in March 2020. Interestingly, India was a net exporter of finished steel during fiscal 2021 with a net trade surplus of six million tonnes, while import of finished steel at 4.8 million tonnes was lower by 29.8 per cent over the previous year.

In these circumstances, the buoyant trend in steel prices is expected to continue in fiscal 2022 and thereafter the stimulus package unveiled by various developed countries will keep up demand for steel. The absence of China from the world export market and higher import of steel by China is one of the major factors keeping steel prices at elevated levels. Continued higher demand from China on the back of a stimulus package and the country's desire to bring down production levels in order to reduce Co2 levels will be an important factor that will strengthen steel prices. The demand-supply imbalance in the global market will also continue to present export opportunities to Indian steel makers.

Maintaining that prospects for the Indian steel industry are bright, Sajjan Jindal, supremo of the JSW group, the largest steel maker in the country, says, "Indian steel is probably the most competitive in the world, maybe even much more competitive as compared to China because we have our own iron ore. That is a big strength. Plus, we have a very high quality of steel manpower and a huge home market. Besides, we have modern and state-of-the-art steel plants. Our costs are probably the lowest in the world. These factors have helped the Indian steel industry to become the most competitive or most profitable steel industry in the world. Going forward, India should be the steel producer of the world, not China."

GLOBALLY ATTRACTIVE

"No doubt, steel prices in India have gone up substantially in recent months but still they are much lower as compared to global levels," points out TV Narendran, CEO and Managing Director of Tata Steel. He adds, "Prices of HRC in the US are at $ 1,500 per tonne, in Europe it is close to 1,000 euros per tonne, while in India as well as in other parts of Asia it is less than $ 1000 a tonne. As the price situation of steel is globally known, the high steel prices will not affect demand in the domestic market. Again, the rising cost of production will see to it that steel prices will not come down significantly from the current levels, if at all. Again, exporters of steel-intensive products will not mind the high prices of steel in India as even at the current prices, they are highly competitive globally."

Ms Soma Mondal, Chairman of SAIL "Prospects for the steel industry are quite promising, There is a lot of positive sentiment. The uptick in activity in the construction, infrastructure and manufacturing sectors augurs well for the steel industry in general and SAIL in particular."

Experts points out that even China cannot spoil the party for India. The recent Chinese move to withdraw export rebates of 13 per cent on 146 steel products, along with rising international steel prices, is likely to benefit Indian steel makers to export more in the coming months as the pace of Chinese exports will slow down considerably.

According to Jayanta Roy, Senior Vice-President, Corporate Sector Ratings, ICRA, "In the current scenario of a moderation in demand for automobiles due to the second wave of Covid-19, fears of the expected third wave and the consequent business lockdowns, Indian steel mills would be able to offload large steel volumes to export markets and still remain highly profitable." In these circumstances, the stock prices of steel companies are not expected to attract any hit. On the contrary, prices of select steel stocks are expected to seek still higher levels in the coming months. Steel stocks which are likely to fetch even higher returns in the coming months are Tata Steel, NMDC, Godawari Power and Ispat, JSW Steel and Shyam Metalics - a point that discerning domestic investors would find rewarding to remember.