Trade war: Supply cuts in China mean good news for India's steel-makers

Supply cuts in China mean better prospects for domestic steel players; macro issues to weigh on non-ferrous players

The nervousness around domestic metal stocks aggravated recently with an escalating global trade war. However, experts believe that non-ferrous metal prices will see higher volatility led by a strengthening dollar and sluggish economic scenario in China and Europe, while the ferrous or steel sector is better placed.

For the Indian steel sector, prospects remain even better --- led by domestic demand.

Domestic steel prices, which had continued to rise since November last year, may soften a bit due to the onset of monsoon when construction activities slow down. Nevertheless, it is seen as a temporary hiccup and prices are expected to catch up thereafter supported by strong demand. The strengthening steel price and production cuts in China are a comfort booster.

Analysts say that the Chinese government’s three-year environmental blueprint raises prospects of wider curbs on steel production in the world's second-largest economy.

The Chinese authorities are intensifying their autumn and winter environmental efforts in more cities than before, suggest analysts and news reports, which also say that China’s clean-air zone could affect half of its steel sector and capacity cuts this year, with the production cuts likely to higher than last year.

The lower Chinese production, on one hand, reduces the threat of cheap imports into India, and on the other hand, the rising steel prices in China also bode well for Asian and Indian steel prices.

Analysts at Emkay Research, thus expect steel prices to remain strong. The production growth for steel in China is likely to remain sluggish in July and August because of monsoon, while government inspections due to environmental concerns will create constraints in the resurgence of scrap-fed induction furnaces, they add.

The impact is visible as Motilal Oswal Securities' metals weekly dated 16th July shows Chinese local hot-rolled coil and rebar prices rising due to concerns over supply cuts.

Thus, experts believe the prospects for India's steel producers remain firm. Tata Steel and JSW Steel, which lead domestic players, remain amongst top picks of analysts.

Tata Steel's increasing focus on its India business and capacities bodes well, and reducing concerns on European operations post joint-venture with ThyssenKrupp add to the positives. JSW Steel remains the most efficient player in the domestic ferrous sector. SAIL and Jindal Steel & Power (JSPL), which are witnessing a turnaround led by improved realisations, have also expanded capacities. For them, the firm pricing outlook would add to the gains.

Meanwhile, during the June quarter, steel companies (Tata Steel, SAIL, JSPL and JSW Steel) are expected to outperform, with 74 per cent year-on-year growth in operating profit due to higher volumes and realisation, say analysts at Motilal Oswal.