- Post investigations, the Director General of Anti-dumping and Allied Duties (DGAD) has concluded that the domestic steel industry has been battling a major injury due to rising volumes of cheap imports. It has thus recommended conversion of anti-dumping duties on hot-rolled coil (HRC) and cold-rolled coil (CRC) products to definitive duties. A similar action is likely in case of coated flat products.
- The move does not come as a surprise, but nevertheless improves the visibility on (1) protection against dumping of flat steel products from the seven countries with significant surplus production and (2) profitability of the Indian steel mills.
- Indian steel mills, however, have new challenges in the form of a sudden spike in coking coal prices and appreciation of the INR. The weakening global market will impact exports, while viability of imports has eroded pricing power for flat products.
- The Indian long product market has improved remarkably over past few months, which may be an early sign of demand pick-up (primarily driven by the construction segment).
- Jindal Steel & Power is our top pick among steel names, as (1) it is coming out of the worst cycle in all its businesses and (2) its volume growth prospects are strong. We maintain our Buy rating on JSW Steel and NMDC, and Sell rating on SAIL and Tata Steel.
DGAD recognizes injury to Indian mills; anti-dumping duties now definitive
- After a long-drawn and extensive investigation, the DGAD concluded that the domestic steel mills have been plagued by injury from dumping of HRC/CRC products by seven countries (China, Russia, Ukraine, Japan, Korea, Indonesia and Brazil). The DGAD has recommended definitive anti-dumping duties if the assessable value of imports (CIF value and basic custom duty) is less than the trigger limit of USD489/t in case of HRC (excluding API grades), USD561 in case of plates and USD576/t in case of CRC. The anti-dumping duty will be the difference between the assessable value and the trigger limit.
- Investigation on other products is still underway, and we expect a similar action.
Visibility of protection against flat products dumping improves
- The move by the DGAD does not come as a surprise, but nevertheless improves the visibility on (1) protection against dumping of flat steel products from the seven countries with significant surplus production and (2) profitability of Indian steel mills.
- The trigger point has increased from USD474/t to USD489/t for HRC and from USD557 to USD561 for plates. On the other hand, it has reduced from USD594 to USD576 for CRC. However, this does not change the calculations because safeguard duties are already providing higher protection. Although the equivalent trigger point for safeguard duty on HRC is USD504/t, the anti-dumping duties will certainly help in some situations (e.g. API-grade HRC which do not attract safeguard duties) (refer Exhibit 1 for detailed calculations).
New challenges – spike in coking coal prices, INR appreciation, imports
- The Indian steel mills are now faced with new challenges in the form of a sudden spike in coking coal prices, appreciation of INR v/s USD and a weakening international steel market. Imports are getting cheaper, exports less remunerative and raw materials cost more expensive. Coking coal prices have doubled within a week due to supply disruption in Australia. All these factors are adding an element of volatility.
- According to our calculations (Exhibit 1), Indian steel mills’ pricing has eroded materially because Chinese API-grade HRC is now available at USD470/t (CIF India), down 10-15% in a month. Although the Indian mills have announced price hikes, cheering the Indian stocks, the transaction prices are understood to have remained unchanged at INR37,000/t. Therefore, we believe the pricing of flat products (HRC, CRC) will remain capped, with downside risk of INR3,000-4,000/t if the international market weakens further.
- The weak international market will also impact Indian exports. India has turned net exporter of steel over past few months (Exhibit 2). We expect the country to turn net importer of steel once again. Indian traders have started booking imports recently after a six-month hiatus. Overcapacity, sluggish demand and imports together may exert pressure on Indian domestic flat product pricing.
- The Indian long product market (Exhibit 3) has witnessed remarkable improvement over past few months. Pricing has started to improve and the discount with flat products prices has narrowed – an early sign of improving construction activities, although this is yet to reflect in demand growth.
Jindal Steel & Power – our top pick
- We recently upgraded Jindal Steel & Power (JSP) to Buy as it is coming out of the worst cycle in all its businesses (long steel products, plates and power sectors). It has been able to not only contain rising debt, but also invested in brownfield expansion to add a new and largest blast furnace at Angul, which is expected to drive strong steel volume growth. Operationalization of 350MW PPA will drive volumes and cash flows of the power business. JSPL also benefits from a spike in coking coal prices as a significant portion of its steel production is based on sponge iron and it operates coking coal mines in Mozambique and Australia. JSP is our top pick.
- We continue to find JSW Steel (JSTL) attractive because of its efficient capital allocation, lowest specific opex/capex in industry and strategic location in the south and west Indian market. Maintain Buy.
- NMDC has been able to grow its volumes, led by strong demand from its key customer and recent capacity expansion. We expect growth momentum to continue. Despite 24% growth, sales at 35.6mt in FY17 have big headroom to grow considering its capacity of 45.7mt.
- We maintain Sell on Tata Steel (TATA) due to its high net debt and sustenance capex, although it benefits from captive iron ore and coking coal mines in India.
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- We maintain Sell on SAIL as it is still in an investment phase, with delayed projects leading to negative free cash flows and mounting debt. High specific opex/capex is a significant drag on return ratios, eclipsing benefits from captive iron ore mines.