For steel, March quarter good, next even better

Realisations, volumes, and profits will improve in March quarter; next quarter may be stronger

The sentiment surrounding the steel sector has improved substantially over the last few months. The imposition of Minimum Import Price (MIP) in February supported domestic steel prices. Cheap imports, especially from China, had been pressuring domestic steel prices. MIP leading to recovery in realisations was the first positive. This was coupled with some rise in steel prices due to production cuts.

Against this backdrop, international steel prices gained some lost ground. Steel prices in China during the March quarter at $331 per tonne were higher than $296 per tonne in the December quarter. Steel stocks too have moved northwards.

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With the imposition of MIP, domestic steel prices have gained Rs 5,000 a ton in March from the lows seen in January. Steel prices in March were Rs 2,500 a ton higher compared to that of the December quarter, says Kunal Motishaw at Reliance Securities.  Hence, March quarter performance for domestic firms such as Tata Steel India, JSW Steel, SAIL (Steel Authority of India Ltd) and Jindal Steel & Power Ltd (JSPL) is likely to better than in the December quarter. But full benefits of the price hikes undertaken will be visible in the June quarter only, say analysts at Centrum Broking.

Not only realisations, volumes too may witness growth. Analysts at Motilal Oswal Securities expect sales volume to increase 13 per cent year-on-year and 25 per cent sequentially to 10.7 million tonnes (mt) for the steel companies mentioned above. Led by a pick-up in volumes and falling raw material costs, the operating performance is likely to improve.  JSPL and Tata Steel India's operating profits are expected to grow 33-37 per cent sequentially. JSW Steel, which sources raw material externally, will see its operating profit double while SAIL's losses will reduce at the operating level.

Credit Suisse upgraded Tata Steel, JSPL, and JSW Steel to outperform. It says that the inventory cycle has bottomed out globally (restocking (replenishing (a store) with fresh stock or supplies) can last more than six-nine months supporting demand and realisations) as the dollar weakness has helped stabilise costs. Hence, with China demand to improve and supply remaining curtailed, there is limited risk for global realisations.