Bull run in steel run set to lose steam

The party for steel companies that have enjoyed a long bull run seems to be coming to an end. A slump in demand from China, trade tensions as well as emerging signs of a slowdown in global economies weigh heavy on steel prices which would remain under pressure as we enter the New Year.

Prices of hot-rolled coil have now touched Rs 44,000 a tonne in December, the lowest in India in a year.

In China, which supplies more than half of the world's steel and whose economic activities drive global steel dynamics, prices have fallen 12% in the last two months. The decline was steepest in November, primarily due to lower-than-expected winter shutdown in the country and rising trade tensions with the US, according to global brokerage house Haitong.

"China's steel sector is slowing. If the weakness extends through 2019, Indian mills could struggle to win customers in export markets as they run up against cut-price Chinese competition, pressuring domestic prices and profitability," commodity research house Argus Media has said.

Expectations of lenient production curbs in China during the winter months and rising steel output amid a seasonal moderation in demand have led to a steep correction in Chinese steel prices in November, said a recent Icra Research report.

The threat of cheaper flat steel imports to India in the near term has increased and, as a result, domestic flat steel producers may have to brace for a downward revision in prices, especially in the fourth quarter of this financial year, the Icra report said.

However, if China, as per the recently unveiled plans, makes further tax cuts and accelerate infrastructure building and urbanisation projects next year, steel consumption might grow, it added.

These proposals approved by Chinese President Xi Jinping that expressed intent to spend more next year could be read as an effort to support economic activity, the report by Argus said.

"One of the main reasons for a sharp correction in Chinese hot rolled coil export prices is the ongoing oversupply concerns in China during winter, leading us to believe that seaborne steel prices would remain soft in the coming months. However, a typical pick-up in Chinese demand post the winter months is likely to lead to a recovery in international steel prices in the next fiscal," said Jayanta Roy, group head, corporate sector ratings at Icra.

Even as steel prices are trending down in the international market, they were holding up well in India, research house Motilal Oswal said.

But that edge may go away soon.

"While the domestic hot-rolled coil prices are currently trading at a marginal premium over imported prices, we believe that the steep reduction in international steel prices recently would make steel imports cheaper from January 2019 onwards, when these shipments start hitting Indian shores, and would, in turn, exert pressure on domestic steel prices in the fourth quarter of FY19," Roy said.

These factors have weighed on the shares of Indian steelmakers, barring stocks like JSW Steel.

MELTING DOWN

• Prices of hot-rolled coil have now touched Rs 44,000 a tonne in December, the lowest in India in a year
   
• The threat of cheaper flat steel imports to India in the near term has increased; domestic firms may have cut prices