>STEEL SECTOR: Prices Under Pressure on China oversupply

We attended Platts’ conference on steel. Key takeaways:
• Iron ore: spot price has corrected sharply in last 2 months to USD 90/t from USD 140/t (62% Fe, CFR China) due to weak steel prices in China and aggressive pricing by Brazilian iron ore producers. However, output cut at Chinese mines (Aug ’12 production is down 10% YoY) would lead to recovery in iron ore
prices from Q4FY13.

• Coking coal: spot price declined to USD 160/t from USD 220/t in Jul ’12 due to strong supply after force majeure ended at BHP’s mines in Australia. However, further downside is limited as spot price is close to cost levels of marginal producers in Australia.

• Steel: prices in Asia corrected due to over-production in China. During March-July ’12, China set a new record of 60 mnt of production each month. Contrary to weak Asian prices, steel prices in US are rebounding on the back of recovery in scrap prices.

Implications for Indian steel producers: Indian steel prices have remained firm (relative to global prices) due to weak INR and lower production from secondary producers. However, average realization will moderate in Q2 due to weak demand and sharp fall in global steel prices. Overall Q2 profitability for Indian steel companies will be lower than that in Q1. We believe production cuts, re-stocking, and potential stimulus in China would lead to recovery in global steel and RM prices Q4FY13 onwards.

Tata Steel remains top BUY
Volume growth on commissioning of 3 mnt project will drive earnings over next two years. Indian operations will also benefit from continuing iron ore shortage in India. Despite weak steel demand in Europe, falling raw material prices would help European operations’ EBITDA to remain positive on yearly basis.

To read report in detail: STEEL SECTOR