India Metals - Steel prices: Reversing the tide - Anand Rathi

Steel product prices are reversing their earlier drop. Sep/Oct normally registers more activity in steel, and falling global steel capacity utilization (~75%) is supporting prices. Further, improved global market sentiment could lead to a mini steel-price rally in 4QCY12 and 1QCY13. The change in steel prices is strongly correlated with global steel stocks. The positive momentum in steel prices should, therefore, augur well for Indian steel stocks that have undershot the benchmark by ~30% in the past 12 months.

- China steel production growth declining. With decelerating domestic demand and exports, China's steel production growth has slowed down. The huge Chinese capacity had led to suppressed global prices due to oversupply and is the key to price recovery in Asian markets. Falling steel prices (~15% in past four weeks), lower profitability and high iron ore inventories have impacted sentiment for steel. Recent government steps on infrastructure spending and global sentiment have had the positive impact of removing the destabilizing effect in the Asian steel market.

- Europe's seasonal recovery. On slowing GDP and investment growth, European steel demand has been hit. Annual demand is down from the pre-crisis ~210m tons to ~150m tons, but a depreciated euro helped curb import pressures. The seasonal uptrend in European demand and stable global prices would help alleviate profit pressures on steel manufacturers.

- Stable US markets. With production levels maintained even after the crisis, US markets have been comparatively stable. The premium in US HRC prices to Chinese steel prices has risen to ~$150 a ton. In the past, when the premium has risen to this level, there has been an uptick in Chinese prices.

Source : Equity Bulls

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