Ferrous metal stocks' spike: Many questions remain

The sharp gains in stock prices are not supported by proportionate improvement in fundamentals, especially demand, say experts

The share prices of ferrous   metal players have seen a sharp rebound in recent past, including on Tuesday. While for iron ore producers such as NMDC, the 22 per cent rebound in international prices has triggered the rally, the handsome dividend of Rs 9.50 per share declared by the company has further improved sentiments. At current levels of Rs 94.30, the stock is up 25 per cent from its February 2016 lows even after going ex-dividend now.

The stabilising international steel prices, implementation of minimum import price (MIP) on steel (thereby supporting domestic prices) and the Budget’s increased allocation to infrastructure bode well and have boosted investor sentiments. Not surprisingly, on Tuesday, JSW Steel scaled to its 52-week high of Rs 1,206.5 before closing at Rs 1,185.75 levels, SAIL closed 8.11 per cent up at Rs 43.30 (29.5 per cent up from its 52-week lows) and Tata Steel closed at Rs 291.85, up 1.21 per cent (29 per cent up in past one month).

The smart gains are encouraging, but experts’ views on a sustained recovery in the fortunes of the sector are not. On Tuesday, for instance, Goldman Sachs said the structural factors that have driven a bear market in metals remains in place and there is little prospect of improvement in Chinese demand.

Back home, Goutam Chakraborty at Emkay Global says that while there are talks of steel price hikes, these have to be supported by demand uptick. Chakraborty is yet not convinced that price hikes can be passed to end-users in the current soft demand scenario.

With no major uptick in demand, fundamentals for iron ore, too, remain weak despite the fact that iron ore prices in the international market have risen 22 per cent this year, making it the best performing commodity. The demand in domestic market remains soft and NMDC might also have limited scope to raise prices with increasing competition due to gradual restart and ramp-up of mines in Goa and Karnataka. The only benefit for NMDC is that it can export some low-grade ore after the removal of export duty proposed in the Budget.  In this backdrop, JSW Steel remains well placed to benefit on raw material cost front, say analysts. Also, with the Karnataka government to auction 11 iron ore mines to end-use steel plants, JSW stands a good chance to bag some, thereby ensuring its longer term raw material captive security. The mines, however, will take two years to be developed, say analysts.

Tata Steel, though, has been performing decently in the domestic arena, but its European operations remain a drag. At a standalone level, Tata Steel had posted an earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne of Rs 6,375 during December 2015 quarter. Comparatively, JSW Steel had posted Ebitda per tonne of Rs 3,497, while SAIL saw operating losses widen to Rs 4,764 crore. For SAIL, reducing costs and improving volumes are key challenges, while for Tata Steel it’s the turnaround of its loss-making European operations.

The domestic steel prices upsurge remains crucial for better profitability for all the players, and gradual increase in prices (if it comes) could provide triggers for the stock. But, the question is: will companies be able to push up prices given the benign demand and the fact that the government will be reviewing the MIP on steel imports in a few months after assessing various factors?