Global price hikes strengthen steel manufacturers; sectoral m-cap up 43%

Steel manufacturers have become the top performers on bourses in recent weeks, with their combined market capitalisation (m-cap) rising 43 per cent in the last two months, vis-à-vis a 17 per cent rally in the Sensex. These include Tata Steel, JSW Steel, Jindal Steel & Power, and Steel Authority of India (SAIL). 

The top 13 iron and steel firms now have a combined m-cap of Rs 2.45 trillion, up from Rs 1.7 trillion at the beginning of October. During the same period, the Sensex has rallied from around 38,000 to 44,600.  Tata Steel has topped the list, followed by SAIL and Jindal Stainless. Tata Steel’s m-cap has risen 74 per cent during this period, with investors betting on a quick turnaround at its loss-making European operations, and higher profits in its domestic business thanks to the sharp rise in steel prices of late. 

In the same period, SAIL and Jindal Stainless have rallied close to 61 per cent.

Analysts say the rally in steel stocks has been fuelled by a global price rise, including in China, which accounts for more than half the world’s consumption.

Hot-rolled steel prices have risen 12.9 per cent in the Mumbai wholesale market since October, and nearly 13.5 per cent in China during the same period. Analysts expect a further rise in India prices.

“After sizeable price hikes in November, large steel players have once again hiked prices, with large players effecting a hike of Rs 2,000-2,500 per tonne across portfolios, and our dealer checks indicate a potential for price hikes in December. These hikes, even if sustained only for a few months, could drive material earnings upgrades,” wrote Gaurav Rateria and Mukund Sarawogi of Morgan Stanley, in their latest report on the Indian steel sector.

According to them, the rise in domestic prices is being drive by the increase in international prices, tight demand-supply situation in which demand is improving faster than production, and rising raw material costs (especially iron ore) given the production disruption in Odisha.

Higher prices will translate to higher margins and profits in forthcoming quarters. Given the industry’s high fixed costs, steel prices and cost of raw material have a bigger impact on industry margins and profits, than volumes, in the short-to-medium term.

This was the case in Q2. Steel makers reported a sharp jump in operating margins owing to a sharp dip in raw material prices and employee costs. Ebitda margins for listed steel makers were up nearly 500 basis points year-on-year (YoY), despite a modest 7.6 per cent growth in net sales from a low base last year.

Industry’s raw material costs were down 14 per cent YoY, while power & fuel costs were down 10.2 per cent YoY during Q2. Firms also saved on manpower cost, which was down 5 per cent YoY.

While some of these savings may dissipate in Q3 and Q4, higher steel prices may more than compensate for this. Analysts at Morgan Stanley expect Tata Steel and SAIL to be the biggest beneficiaries of the current price hikes, given their backward integration into captive iron ore mines.