>STEEL: Restocking‐driven recovery, underlying demand remains weak

■ Surge in European steel prices driven by restocking: European steel prices rose by ~US$69/t (YTD CY12), attributed primarily to restocking, firm global prices and unreasonable fall in prices during Q4CY11. However, real demand continues to remain subdued. Based on Eurofer (European steel association), real steel consumption fell by ~0.4% YoY in Q4CY11, while apparent consumption saw a sharper fall at ~4% YoY, owing to accelerated destocking. The association expects continued weakness in real consumption in the next 2-3 quarters, given the dearth of new orders and tepid investment climate. The region also runs a risk of peaked-out net exports of ~1.5m tonnes, highest in the past seven years. We remain highly cautious on European steel prices, given the sluggish domestic demand outlook and high dependence on volatile exports market.


■ China witnessing protracted demand slowdown: Demand environment continues to remain challenging in China on the backdrop of 1) tight liquidity gauged by lowest ever growth in money supply (MS) in the past 10 years during the month of January @ 12% YoY 2) weak demand across the major consuming sectors during December; vehicle sales (down 26% YoY), real estate (down 22-23%) and machinery (down 8%) and 3) sharp deceleration in Fixed asset investment (flat YoY in December), the major driver of China’s steel demand. We expect short-term recovery in demand and prices from the current trough levels on the back of liquidity easing. However, we don’t expect rally in prices to sustain for long given elevated stock levels and weak demand outlook.


■ US, the only bright spot: Thanks to strong liquidity (MS↑10%), accelerated expansion in investment (Gross private investment↑10%) and consumer demand, US apparent consumption grew by 8% in January to 8.8m tonnes; almost near its pre-crisis levels. We expect demand to remain firm in the coming months as suggested by all leading indicators. However, the wide price differential between US and other regional prices would pose a major or the only risk to the domestic prices in the near term.


■ Reiterate Accumulate on Tata; downgrade JSPL to Reduce: We remain positive on Tata given the underlying distress valuations of European operations (EV/tonne of US$200), strong domestic operations and increased raw material self-sufficiency. We downgrade JSPL from ‘BUY’ to ‘Reduce’ on account of expensive valuations. JSTL remains our least preferred stock in the space, backed by underlying risk associated with shortage of iron ore and expensive valuations given the abnormal exposure to acceptances. Maintain ‘Reduce’ on SAIL given the expensive valuations and below average project execution.


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