We expect the current momentum in the ferrous space to sustain led by: 1) demand recovery in China’s construction sector; 2) better profitability of China’s steel players; and 3) domestic steel players’ sales surpassing estimates. We have been highlighting the signs of demand recovery in China in our earlier notes. Despite long-term growth concerns, we expect ferrous stocks to outperform non-ferrous peers in the near term spurred by: 1) tailwinds in China in a seasonally strong period; and 2) tight demand-supply in the domestic market. Maintain ‘BUY/SO’ on Tata Steel and JSPL.
China’s steel sector gathering steam after New Year
According to a Mysteel survey, margins of steel players have inched up by March end: 1) average profit of integrated steel makers operating blast furnaces rose 21% MoM to CNY 463/t; 2) average profit of 91 rebar players surveyed grew 15% MoM to CNY 322/t; and 3) average profit of 10 re-rollers surveyed jumped 36% MoM to CNY 150/t. Inventory as on April 5, 2019, for rebars and HRC has declined for the sixth successive week—down 16% to 7.6mt and 18% to 2.7mt, respectively, compared to February end. For the week ending April 5, 2019, capacity utilisation of rebar and flat steel players grew 1.3% to 75.6% and 1.0% to 81.2%, respectively. We expect production to rise further as steel makers in North China gradually ramp up operations after lifting of winter curbs from March end. Going ahead, we expect: i) profitability of steel players to improve further as they increasingly utilise low-grade iron ore; and ii) prices to stay robust owing to pick up in construction-related activities.
Domestic Q4FY19 steel volumes surpass estimates
On the domestic front, steel sales surpassed our estimates for Tata Steel and SAIL as a result of inventory destocking and better–than-expected demand. The biggest positive surprise was the 18% YoY growth in Bhushan Steel’s (primarily produces auto grade steel) sales. JSW Steel’s total Q4FY19 production volume for flats and longs was 4.0mt. Taking cognizance of destocking by Tata Steel and SAIL, we expect JSW Steel’s shipments to surpass our 4.1mt estimate.
Continue to prefer ferrous over non-ferrous
We continue to prefer domestic ferrous stocks over non-ferrous owing to better–than-expected sales volume and tight demand-supply in the steel sector. In addition, demand uptick in China is showing signs of sustenance in the near term, which could result in lower exports and high domestic prices. We remain cognizant of long-term risks in the sector arising from global (and China) slowdown and trade brawls. However, in the short term, we expect steel stocks to outperform non-ferrous peers. We maintain ‘BUY/SO’ on Tata Steel and JSPL.