News Room - Steel Industry

Posted on 10 Mar 2008

Analysts bullish on steel sector

Analysts across broking houses are upgrading their stance on Indian steel companies, especially considering the beating that steel stocks seem to have taken of late. Credit Suisse was the latest house to join the band wagon which raised its target prices for most steel stocks. It is bullish on JSW, Tata Steel and SAIL but Tata Steel is its top pick.

Analysts say that iron ore shortages are hurting supply. Under normal circumstances, the $150-plus price increases/ tonne seen since the July 2007 trough would have led to a strong supply response globally. “Production growth, instead, has come down — a first in 15 years. This is not merely due to cost increases, as cost pressures and pricing power have almost no correlation,” the broking house Credit Suisse remarked in a note to clients.

The broking house also feels that decline in Chinese production growth has been hurt by raw material shortages. “We find year-on-year growth has picked up in all geographies except the EU and China (together 53% of global production). It seems raw material shortages have kept Chinese production growth under check,” said Credit Suisse’s Neelkanth Mishra in his recent report on the steel sector.

He attributes a sharp slowdown in domestic ore production (still about two-thirds of ore supplies for China) as an important reason. He expects it to remain low, keeping steel supply in check.

Another main issue seems to be coking coal intensifying shortages. Floods in Queensland have resulted in 16-24 million tonne of coking coal shortage, translating into 20-30 million tonne of steel. India gets 80% of its supplies from Queensland, and will be the most impacted in the near term.

Credit Suisse also said that the demand may fall less than supply leading to steep price increases. “We expect 20 million tonne of demand growth ex-China in 2008. Together with an expected 20 million tonne decline in Chinese net exports and the coking coal impact, a 60 million tonne supply increase is needed outside China — a difficult task, in our view,” the report said.

Although the report warns that steel stocks have been rerated sharply over the past three years (as the market has gained confidence in the steel super-cycle). So much so that the valuation discount that was applied to Indian steel companies versus the global leaders has now disappeared, and in the case of SAIL, has even turned into a premium, it feels.

Hence it infers that steel stocks will continue to be quoted at a price multiple at which they are quoting now. Its top pick is Tata Steel as it believes the company has strong volume growth in India, as well as high self sufficiency in iron ore and coking coal which helps margins. It also estimates that Corus stands to benefit significantly from leverage measures to improve Corus self-sufficiency —Ivory Coast iron ore and Mozambique coal will improve longer term profitability.