Steel sector update - Geojit BNP Paribas Financial Services

- Prices sticky but mild destocking to follow Channel checks reveal rising caution amongst steel dealers due to seasonal demand weakness and customers ordering on a needs-only basis. While end-user stock levels are low, dealers are still carrying high inventories. With the rise in payment delays and interest costs, dealers are looking to cut inventories. It seems that unless mills trim production to match the demand weakness, inventories will rise, leading to near-term steel price weakness.

Domestic flat steel prices were largely unchanged in 2Q12 despite an 8-11% drop in China/CIS prices due to 10% INR depreciation. Long product prices on the other hand have been supported by continued shortage of lumps and power.

- Prices in China and Europe also soft In China, Baosteel recently cut its August HRC/CRC prices by USD31-41/tonne to bring them closer to spot prices. European flat steel prices remain weak despite the hikes announced by some mills while long steel prices have stabilised after the scrap-led June declines. Imports are also at low levels due to weak demand and better opportunities for CIS mills' in the Middle East. The last four to five weeks have seen further production cuts announced by Arcelor Mittal, Tata Steel, ThyssenKrupp and Lucchini.

- Raw materials price stable; coking coal rising Iron ore prices have remained stable in 2Q12 as rise in China's steel production was met by an equally impressive rise in iron ore exports from Australia and Brazil. At the same time, scrap prices plummeted due to lower imports from Turkey/higher exports from Europe and rising prompt scrap supplies from the US auto industry. Metallurgical coal on the other hand has fared relatively well, with 3Q12 contract prices settled at USD225/tonne (USD205/tonne on 2Q12), benefitting from tighter supplies due to ongoing strikes at BHP Billiton's mines.

- Expect demand/price rebound by September

It is expect to see a mild destocking and small price declines in domestic steel market as stockists adjust their inventory levels. Demand growth is expected to come back by end-3Q12. Globally, the economic cycle is expected to bottom out in 3Q12. In China,the state council could soon adopt bolder and stronger stimulus measures focused on railway, urban infrastructure, energy, telecom, health and education.This stimulus program should translate into on-the-ground demand by late-August/September and hence, spot steel prices are expected to see an uptick around the same time. Economists expect eurozone GDP to 'muddle through' in 2012 with a 0.5% decline, followed by a modest rise of 0.6% in 2013. Consequently, European steel demand is expected to bottom out by 4Q12. Raw material prices - especially iron ore - to see modest recovery beginning end-3Q12 aided by rising steel demand/production in China. The outlook remains positive on ferrous steel sector and reiterate 'buy' on SAIL, JSPL and Tata Steel.

Source : Equity Bulls

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