Published on 12/09/2017 3:31:56 PM | Source: Emkay Global Financial Services Ltd

Metal And Mining Sector Update - Emkay

Import threat back in play??

* Steel consumption grew by 4.6% yoy to 7.4mt in August’17 and by 4.4% year-to-date (ytd) to 35mt. Consumption growth remains firm and any uptick in construction activity should move the needle northwards. Inventory in the system stands at 6.2mt, flat on MoM basis.

* Production in Aug’17 stood at 8.8mt, with growth dropping significantly to 2.3% yoy. This was primarily due to a 25% yoy decline in output at Tata Steel to 879kt following a periodical maintenance shutdown. Production at all other companies grew by 13% yoy to 4.3mt.

* Imports grew by 62% yoy to 955kt (+20% mom), surpassing exports in absolute terms. Exports stood at 923kt (+36% yoy). In July’17, exports had grown 62% yoy. Growth momentum in exports is also slowing.

* We believe that the Indian steel industry will continue to face demand headwinds unless there is revival in private capex and improvement in contruction activities. On the supply side, we expect better output due to anticipated project ramp-up in SAIL. In the absence of demand revival and rise in imports, it will be difficult for steel companies to maintain prices at current level.


Import surpassed exports in absolute terms

Growth in finished steel production for August’17 slowed significantly to 2.3% yoy, primarily due to a 25% yoy decline in the output of Tata Steel. Except Tata Steel, all other companies recorded a decent growth in production. Consumption remained resilient, growing by 4.6% yoy to 7.4mt. However, imports rose substantially by 62% yoy to 955kt and exports stood at 923kt. A continuous rise in imports will put downward pressure on flat steel product prices in the domestic market. So far in Q2FY18, the flat steel product prices have risen by c.14%


Expect better output going forward

Domestic steel demand seems to have improved a little bit, while output continues to grow at a modest rate. Output was affected due to a weak performance of Tata Steel following a periodical maintenance shutdown. SAIL and RINL witnessed a strong improvement along with Essar Steel, JSW Steel and JSPL, implying better ramp-up in these companies. YTD demand growth of 4.4% is still low and it will be crucial for the industry to see an improvement on this front so as to maintain the prices. We expect better output going forward, as the project rampup takes place in SAIL. If import continues to rise, it will be difficult for domestic companies to find customer for its excess production. Flat steel prices would thus face downward pressure.

We have BUY rating on MOIL (TP Rs425), Accumulate on Coal India (TP- Rs 279), Reduce on SAIL (TP Rs53) and HOLD on NMDC (TP Rs119), Tata Steel (TP Rs584) and JSW Steel (TP Rs240).


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