Steel - Brief rally supported by low inventories across markets - Prabhudas Lilladher

Domestic steel prices extended their weakness in October and November in the wake of weak demand, sustainable elevated imports from sticky markets (Japan, Korea and China) despite firm global prices. Attempts were made by some of the producers to raise prices but ended in vain due to increased supplies and lacklustre demand. On the contrary, global spot prices hardened by US$25-30/t during November, primarily on the back of re-stocking and low inventory. However, we believe that further price hikes are unlikely due to sluggish real demand.

- US lead the price increase: Steel prices in US rose by US$50-55/t during November on the back of increased activity ahead of holidays, lower inventories and higher scrap prices. Our channel checks expect prices to remain stable while ruled out further price hike on the backdrop of low restocking activity and weak real demand. European prices moved least among the regions with an increase of US20/t, largely following the global prices.

- Chinese domestic prices back to correction: Chinese Re-bar prices corrected by US$30/t in November with prices retracing back to September-mid levels of US$570 (inclusive of 17% VAT). Indecision on new infrastructure projects announced under old regime and weak construction activities in real estate sector resulted in fall in prices. On the contrary, HRC prices moved up by US$20 and US$50/t over October and September end levels, respectively, at US$623 on the back of low inventory and stable demand.

- Domestic market, deterred by weak demand: Based on recent data from JPC, domestic steel consumption growth has slid to 4.2% in Apr-Nov'2012 to 48.4m tonnes against 7.6% and 5.1% in Q1FY13 and H1FY13, respectively. Our channel checks paint weak demand outlook, given subdued order bookings (in Auto and Infra) and dearth of enquiries. We expect domestic prices to underperform global prices on the premise of weak demand outlook, increased domestic supplies and reduced duties on imports from Japan and Korea under CEPA.

- Valuation and outlook: We remain unmoved on our Underweight rating on the sector, given the continued weakness in demand environment across the markets, subdued earnings profile and unattractive valuations. Weak fundamentals manifested in fragmented and contrary price movements across the markets, weak export prices and falling input prices.

Source : Equity Bulls

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