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Investors exercise caution on steel stocks on rising input costs

MUMBAI: A strong demand and improving realisations notwithstanding, investors have been turning cautious on steel stocks, largely because rising cost of key raw material such as iron ore and coal have led to concerns on profit margins of steel manufacturers. Tata Steel Ltd, JSW Steel Ltd, Steel Authority of India Ltd, and Jindal Steel and Power Ltd – all saw some corrections on Monday.

The Street remains watchful of steel demand and prices after the end of Chinese New Year celebrations.

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The rise in international iron ore prices has been phenomenal. Global prices, ex-China, that hovered below $120 per tonne in November are now close to $170. Compared to this, prices during October 2019 to April 2020 had moved in the range of $80-$95 a tonne. As a result, domestic prices of the raw material have also trended higher. NMDC Ltd, India’s largest iron-ore producer, raised prices by about 50% during October-January.

Fortunately, Tata Steel and SAIL have captive supplies, while JSPL is benefitting from inventories at its Sarda Mines. The concerns for JSW Steel, however, remain elevated. Also, the pressure on profit margins of non-integrated steel producers will be significant.

Global coking coal prices have also been impacted, with China imposing curbs on imports from Australia, the world’s largest exporter of the commodity used to make steel. Due to these import restrictions, Australian coking coal prices have been falling while the Chinese equivalent have continued to rise. The US and Canada are the only meaningful competitors of Australian coking coal.

Coal futures have risen 23% since November, when China, the largest consumer, imposed restrictions. Coal prices in India cannot remain unaffected.

Rising realisations, however, can accrue benefits but the trend needs to sustain. Steel prices in China have remained rangebound with the start of the festive season there. Moreover, a fall in consumption in China can lead to a spurt in exports, which can impact regional prices. But a rise in prices in India has the potential to invite government intervention.

Domestic prices of hot-rolled coil, a steel market benchmark, retreated after 19 weeks of a sustained uptick, primarily because the government had voiced concerns, said analysts at Edelweiss Securities Ltd in a 14 January Note. They added that China’s HRC prices and spreads continued to come off predominantly due to seasonal slowdown in downstream sectors. This could spur exports, dampening regional prices.

With caution prevailing on prices and rising input costs, investor are bound to be wary of steel stocks even as analysts remain bullish.

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