Shares of JSW Steel, Tata Steel ral­lied 40% since Feb af­ter the in­tro­duc­tion of MIP

The Economic Times - - Commodities Plus - Jwalit.Vyas@ times­

ETIG: Is the rally in shares of In­dian steel com­pa­nies such as JSW Steel, Tata Steel and SAIL sus­tain­able?

Shares of JSW Steel, Tata Steel and SAIL ral­lied 20-40% since Fe­bru­ary af­ter the in­tro­duc­tion of min­i­mum im­port prices for steel by the In­dian govern­ment and sharp re­bound in Chi­nese steel prices. That may help steel pro­duc­ers post de­cent earn­ings for the next two quar­ters. Cur­rent share prices seem to fac­tor in most of the pos­i­tives.

The re­cent rally in Chi­nese steel prices could be tem­po­rary. Low in­ven­to­ries, tem­po­rary clo­sures and a sea­sonal de­mand were the pri­mary rea­sons for higher steel prices over the last cou­ple of months. Since Fe­bru­ary, steel price in­creased 50% in China. But de­mand may not sus­tain for the rest of the year. Past trend shows that steel de­mand picks up around the Chi­nese New Year due to re­stock­ing and then it ta­pers. This year, in­ven­to­ries were at multi-year lows. This raised prices which in­creased pro­duc­tion.

Pro­duc­tion grew 2.8% in China in March. Ac­cord­ing to World­steel As­so­ci­a­tion, Chi­nese de­mand is likely to de­cline 4% in 2016 and 3% in 2017. The rest of the year may be weak for the steel in­dus­try.

In­dian steel play­ers may have added ad­van­tage of MIP. Since the in­tro­duc­tion MIP in Fe­bru­ary, Chi­nese steel prices have ral­lied around 45% and In­dian steel prices at about 25%, mak­ing In­dian steel prices on an av­er­age 6% cheaper than the landed cost of im­ported steel. But, MIP is only a tem­po­rary mea­sure which will be re­placed by anti-dump­ing du­ties. The cur­rent MIP will ex­pire in Au­gust this year and an al­ter­na­tive and less strict mea­sure will be im­posed. An­a­lysts say the cur­rent share prices al­ready fac­tor in price re­cov­ery of .₹ 4,000 per tonne. In com­par­i­son, ac­tual price re­cov­ery is of .₹ 2,000-3,000 per tonne year to date. Although the mo­men­tum in steel stocks may con­tinue for some time, in­vestors should be cau­tious.

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