Global brokerage JP Morgan stated in its most recent report that for Indian steel producers, regional steel prices, domestic demand, and export opportunities are what matters the most at the moment.
On the backdrop of improving domestic demand, re-opening of export markets and higher domestic steel prices, the brokerage believes the Indian steel mills are well positioned.
“We remain 'Overweight' on Tata Steel Ltd and Steel Authority of India Ltd and see the lower institutional ownership as an additional positive for stock prices,” said the brokerage.
According to the report, the regional hot-rolled coil (HRC) steel prices have moved from nearly $575/tn to $660/tn, and prices are higher in the spot market in Europe and the US.
The brokerage expects one to two additional price increases given that domestic steel prices have increased by around 10% over the last three weeks and are still below import pricing.
Indian steel companies consistently mentioned strong domestic demand in their recent results calls. Finally, the export market has opened up as a result of the removal of export duties, which is advantageous for Indian steel businesses.
Hence, for Indian steel companies, the three critical variables are regional steel prices, domestic steel demand, and export market opportunities.
"With the weak 3QFY23 earnings out of the way, fundamentals improving and ownership below trend, we see a positive environment for Indian steel stocks," said the brokerage.
However, investor sentiment is still negative towards metals generally and steel specifically, with the major worry being the absence of a significant revival in demand in China.
JP Morgan China Basic Materials analyst Po Wei expects better Chinese steel demand in calendar year (CY) 2023 and believes the slow recovery seen so far is likely due to a slower return of the labour force after Lunar New Year.
For Chinese steel companies, Po expects ‘steel margins to recover in 2023, leading to a re-rating for steel names which are still trading at depressed price-to-book ratios (P/Bs)’.