The sharp increase in coking coal costs will hurt near term margins of Indian steel companies due to the lag effect in transition of increased cost to higher steel prices. Steel spreads (and consequently prices) are improving globally and we expect margins to normalise soon either through decline in coking coal prices, or higher steel prices. China’s tighter control on steel supplies through capacity cuts and plant idling on weak industry margins and for pollution control is encouraging too. We maintain add with revised TP for Tata Steel at R460 (R465) and JSW Steel at R1,900 (R2,070).
Weaker domestic demand in November – December 2016 due to demonetisation has not helped either. However, domestic steel prices (especially for flat products) are now increasing fast led by higher global steel prices and consequent increase in import offers; China prices have increased by 40% since October 2016 (from raw-material cost push) which compares to 15% increase in domestic HRC prices (+R4,600/tonne q-o-q in 3QFY17).
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The increase in long product prices though has been lower at 9% (+R2,200/tonne q-o-q in 3QFY17) due to weak domestic demand and overcapacity. Weaker long product prices will hurt earnings of mid, small-sized steelmakers more. Tata Steel and JSW Steel have relatively lower exposure to long products (25-30% of product mix).