The metal stocks are in focus this morning, especially the steel stocks. Some of the steel stocks like SAIL, JSW Steel and Tata Steel are up smartly with as much as 4% intra-day gains. The Nifty Metal Index is up 1.4% and the BSE Metal Index is up 1.5% intra-day. This is after the Commerce Ministry arm, the Directorate General of Trade Remedies (DGTR) recommended imposing 12% provisional safeguard duty for 200 days. This ad valorem duty will be imposed on select steel products and the aim os to protect the interest of domestic steel players as imports surge.
What’s the safeguard duty all about?
The DGTR had launched a probe last December to determine whether to impose a so-called safeguard duty as record imports into the country forced top steel mills to petition the government. The safeguard duty has been proposed to be levied on select products including hot-rolled coils, steel sheets and plates and cold-rolled coils and sheets. The Ministry of Steel initiated a safeguard duty investigation for assessing the impact of damage caused to the domestic steel industry due to increased imports. The investigation could take as long as six months.
“Domestic flat steel prices have increased 5% in the last month against the weakness in regional prices. The divergent move is led by the widely anticipated safeguard duty, which could come in at 12% (DGTR has recommended the imposition of a 12% provisional safeguard duty for 200 days). Domestic prices are at a 7-8% premium to import parity, leaving little room for further hikes in the former case. In the past few weeks, Vietnam, South Korea, Europe and the US have imposed/increased tariff barriers against steel imports, whereas investigations are ongoing in a couple of countries, including India,” said Shrikant Chouhan, Head Equity Research, Kotak Securities.
“Steel margins have bottomed out in 3QFY25, and we expect a recovery in 4QFY25, with price hikes and muted costs. However, further expansion is dependent on trade measures and supply-side reforms by China. We find better risk-reward in non-integrated steel producers such as JSPL/JSTL, and remain SELL on integrated producers such as SAIL, TATA and NMDC,” he added.
Precedent of safeguard duty on steel
If we look at historical developments, in FY16 during the government imposed a 20% safeguard duty on import of HRC for 200 days during the anti-dumping investigation. Following the conclusion of this investigation, the safeguard duty was removed and an anti-dumping duty (ADD) was imposed on Chinese steel imports in FY17. The Ministry of Steel initiated a safeguard duty investigation for assessing the impact of damage caused to the domestic steel industry due to increased imports. The investigation could take as long as six months.
JPMorgan on safeguard duty for steel products
According to a JPMorgan report, the “long-awaited safeguard duty finally announced – 12% for 200 days is a positive for Indian Steel companies. Once implemented, this should increase the landed cost of imports by Rs 5,500/tonne. But the effective increase in domestic HRC prices could be lower at Rs 2,000/tonne.”
JPMorgan expects complete flow through to EBITDA and they see scope for earnings estimates to be revised upwards for FY26.
Steel stocks have been rallying on the back of optimism around Chinese output cuts, German infra fund and safeguard duty imposition. The preferred picks for JPMorgan includes Tata Steel and JSW Steel. They also expect sharp move in SAIL share price.
Nomura on Indian Steel stocks
Nomura, the Japanese brokerage house, in a report dated March 6 pointed out that “the price hike window is smaller for domestic producers, as with supplies resuming from Australia, global iron ore prices will soon start easing.” They expect aggressive iron ore price hikes following the announcement of the safeguard duty. According to their estimates, Rs 600/tonne price hike in iron ore would result in Rs 1,000/tonne increase in the consumption cost for convertors such as JSW Steel, Jindal Steel & Power. According to them, integrated players such as Tata Steel and SAIL would be better placed in such as
scenario. Nomura maintains a positive stance on the India steel industry and maintains Buy rating on JSW Steel and Jindal Steel.