Saturday, June 23, 2012


Pricing shows deep scars globally, margin pressure to resurface for producers

Global steel prices corrected further and benchmark HR price fell below US$575/tonne in CIS markets, down by ~5% MoM and ~12% from their CY12 highs. Global steel production run rate stood at 4.2 MT/day with capacity utilization of 79.6%. Steel production and exports remained high from China but is expected to come down going forward as sharp steel price correction is expected to remove marginal producers from the market. Raw material prices have remained stable to positive due to high steel production led demand (especially from China). Domestic steel prices have remained stable due to weak rupee and import duty cushion but we expect them to come under pressure with sharp fall in global steel prices. We see earnings and margin pressure resurfacing for producers from Q2FY13E and maintain our cautious stance on the steel space.

Monthly steel production stood at 130.6 MT in May-12, up ~0.7% YoY with a daily run rate of 4.2 MT/day and a capacity utilization of 79.6%, down by 170bps MoM. Supply from marginal producers remained high and China’s production stood at 61.2 MT with a daily run rate ~2 MT. Several steel producers announced production cuts due to the sharp fall in prices and low demand and production is expected to soften in June.

HR coil prices corrected sharply in the last few weeks (we had anticipated steel price correction in our last few monthly reports citing rise in production and lackluster global demand) and steel prices in CIS markets slipped below US$575/tonne, down by ~5% MoM. Prices in China also corrected by ~3% MoM and those in Europe and US fell sharply too.

Domestic steel prices have remained flat on account of rupee depreciation and better demand scenario and imports in India jumped ~33% YoY in Apr-May’12. We expect domestic steel prices to come under pressure and global steel prices to remain soft going ahead due to slow uptick in demand. However, production cuts from steelmakers globally would limit the steel price fall from hereon.

Raw material prices have remained stable and iron ore prices hovered in the range of ~US$135-137/tonne for 62-63% Fe grade; hard coking coal contracts for Q2FY13E got settled at US$225/tonne, higher by 7% QoQ.

Iron ore mining in Karnataka is expected to restart from July-12 after CEC started approving the R&R plans of the miners. This is expected to bring ~12 MT iron ore production in H2FY13E and be positive for JSW steel.

Among base metals, LME average prices dropped by 2-6% MoM as demand remained lackluster. Current LME prices remain below marginal COP and we expect limited downside going forward. Inventories remained high overall despite some supply cuts by producers.

Shareholder votes on approval of Sesa Sterlite merger has been cast in the EGMs and the outcome is expected on 25 June 2012.

We remain positive on mining stocks based on strong balance sheets and attractive valuations. HZL remains our top pick in the mining space followed by Coal India and NMDC. We maintain our cautious stance on the steel space and retain sell calls on SAIL and Tata steel as we remain concerned on the sustenance of steel prices in domestic market going ahead. We remain positive on the non-ferrous space due to our expectation of reversal in LME prices and maintain buy on Sterlite.