Signs of steel prices hitting alltime low leaving out a ray of hope for steel players with increase in demand

23 April 2015

Metal sector has shown some promise in the recent past despite concerns on broader indices that continue to trade weak.

The CNX Metal index that had fallen to one-year lows of close to 2,293 in mid-March is now trading at 2,460 levels, a gain of almost 100 points or 7%.

Amongst the constituents, the ferrous players have seen some upside. Tata Steel that saw 52 week lows of Rs 311.30 on 27 March was trading at Rs 346 levels on Wednesday.

JSW Steel, too, saw 52-week lows of Rs 880 on 26th March and now trades at Rs 948, while SAIL after seeing closing lows of Rs 65.75 on 9th of March has recovered to Rs 73.

There are some signs of the steel stocks having bottomed out. Even though the global and domestic steel prices remain soft, there has been positive signals emanating from European demand and pricing.

Goutam Chakraborty at Emkay Global says that the steel prices seem to be near the bottom and significant downside from here seems unlikely.

For Indian non-integrated players, the domestic iron-ore prices declining provide further comfort. Recently, NMDC cut prices of iron-ore fines by 20% and lumps by 6.1% to Rs 1,960 a tonne and Rs 3,050 a tonne, respectively in a surprise mid-month review.

This is likely to benefit players as JSW Steel who do not have captive iron ore supplies. For players as Tata Steel and SAIL, the restarting of mining in Orissa bodes well. Also, the concerns on mining royalty seem to be factored in for these players having captive resources.

It is in this backdrop the stock prices have recovered. In fact, on Thursday, Bank of America Merrill Lynch upgraded Tata Steel stock with a target price of Rs 500, which saw the stock rise over 4% to Rs 366 levels.

However, don't expect any significant boost to the fortunes of steel companies in the near-term given the weakness in demand and prices. But, investors with a medium term outlook can accumulate select stocks on decline.

Amongst the metals companies, JSW Steel and Tata Steel are top picks of majority of analysts.

While JSW Steel's majority sales are in the domestic market, Tata Steel also has exposure to Europe. Analysts, looking at declining raw material prices and royalty as well as the Mining Bill, believe that the non-integrated business model of JSW Steel is proving to be a boon in difficult times.

Its margins are also to expand with lower raw material prices, including that of coal. While the demand recovery in the country is some time away and may cause pressure on steel companies, the curbs on imports should help.

For JSW, volume gains and efficiency improvements at its Dolvi unit led by brownfield expansion should benefit the company. Thus, while analysts at Centrum Broking have a target price of Rs 1,400, analysts at Motilal Oswal Securities have target price of Rs 1,126 a share.

Tata Steel also will benefit from lower raw material cost, as the high cost imported iron ore inventory is gradually phased out, say analysts at Motilal Oswal Securities. Moreover, commissioning of Kalinganagar (3MT) will add to margins through higher operating efficiency.

They expect Tata Steel India business EBITDA/tonne to improve to Rs 13,000 by FY17 from an estimated Rs 8,470 in March 2015 quarter. They value Tata Steel stock at Rs 505.