The Indian steel industry is regaining investors’ focus, driven by continued strength in domestic HRC prices and improving steel spreads. On the other hand, the external environment, including steel prices from China, discipline and cost of coking coal, is giving out conflicting signals.
With major steel companies including Tata Steel, JSW Steel, Jindal Steel and SAIL exposed to these changing market conditions, movements in domestic prices, global demand-supply dynamics and raw-material costs could remain important factors for the sector’s outlook.
Morgan Stanley On Steel: Constructive Outlook for the Next 12 Months
Morgan Stanley expects steel stocks to perform well over the next 12 months, supported by relatively healthy domestic demand, low inventory levels and improving steel spreads. The brokerage noted that domestic hot-rolled coil (HRC) prices are currently around 3% above import parity, indicating that domestic prices continue to maintain a premium over comparable imported material.
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Indian HRC spot spreads also expanded by around 1% during the week, providing some support to steelmakers’ profitability. Morgan Stanley believes that low inventories, combined with relatively healthy demand, should limit concerns around a sharp restocking cycle. This could provide a more stable backdrop for domestic steel prices in the near term.
Safeguard Duty Supporting Domestic Steel Prices
Another important factor highlighted by Morgan Stanley is the safeguard duty on steel imports, which has helped support domestic prices and spreads. The duty makes imported steel relatively less competitive in the Indian market and can provide some protection to domestic producers when global prices are weaker.
The brokerage remains constructive on steel prices and spreads over the medium term, although the outlook will continue to depend on global supply-demand conditions. Developments in China are particularly important because the country is the world’s largest steel producer and consumer.
China Supply Discipline Could Be a Positive Trigger
Morgan Stanley also sees China’s efforts to address overcapacity and “involution” as a potential positive trigger for the global steel market. Any meaningful reduction in excess production could help improve the global supply-demand balance and provide support to international steel prices.
For Indian steelmakers, a tighter global market could also reduce the risk of a sharp increase in low-priced imports. Therefore, developments in Chinese production, exports and domestic steel prices will remain important factors for the sector.
HSBC On Steel: Near-Term Caution Emerges
While Morgan Stanley maintains a constructive medium-term view, HSBC has adopted a more cautious stance for the next 2–3 months. The brokerage believes that muted increases in regional steel prices could put pressure on Indian trade prices and, consequently, steel stocks if the recent momentum in steel prices starts to weaken.
Indian retail HRC prices have increased by around 10% over the past three months and are now broadly at parity with landed import prices. This indicates that the earlier price advantage of domestic steel producers has narrowed.
China HRC Prices Key for Further Rally
HSBC noted that Indian steel stocks have rallied alongside the increase in domestic trade prices. However, for the equity rally to continue, the brokerage believes investors would need to see further increases in Chinese HRC prices.
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This makes China’s steel market an important monitorable for Indian steel companies. If Chinese steel prices remain subdued, the ability of Indian producers to push through further price increases could become more difficult. On the other hand, stronger Chinese prices could provide additional support to global steel prices and domestic realisations.
Coking Coal Prices Remain a Key Cost Factor
Raw-material costs are another important factor for steelmakers. Coking coal prices remain elevated, which could keep pressure on production costs and margins. However, HSBC expects the restart of coal mines in Shanxi, China, to potentially cool coking coal prices.
The impact of coking coal prices will differ across companies depending on their level of exposure and sourcing arrangements. HSBC highlighted that Jindal Steel and Tata Steel have lower coking coal exposure, while SAIL has the highest exposure among the companies discussed.
Tata Steel and JSW Steel in Focus
HSBC prefers Tata Steel and JSW Steel, citing their relatively high exposure to flat steel products. Flat products such as HRC are widely used in sectors including automobiles, consumer durables and engineering, making their pricing an important contributor to steelmakers’ revenue and margins.
Conclusion
The outlook for steel stocks will largely depend on how domestic HRC prices, Chinese steel prices and raw-material costs evolve from here. While Morgan Stanley sees supportive demand, low inventories and safeguard duties providing a favourable backdrop, HSBC highlights the possibility of near-term pressure if regional steel prices remain muted.
For Tata Steel, JSW Steel, Jindal Steel and SAIL, investors will therefore need to track Chinese HRC price movements, domestic steel spreads, coking coal costs and changes in the global supply-demand balance. These factors could play an important role in determining whether the recent rally in steel stocks can sustain its momentum.