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