Steel: China remains a worry

Improved profitability of Chinese steel mills despite lower steel prices and sluggish RE sector could support elevated steel exports even as balance Chinese economy sees a gradual recovery. Recovery in ex China steel demand including strong expected growth in India is a positive for steel names as is the improvement seen in spot spreads led by correction in RM prices. Analysts of IIFL Capital Services continue to like JSPL & TATA.

Chinese supply remains a concern:

With a sharp spike in steel exports to 9.88mt in Mar-24, China continued to export the weakness to global market. Importantly, this can continue given that Chinese mill profitability has improved even as real estate sector remains sluggish. Uptick in infrastructure and manufacturing output lend some comfort but would not necessarily provide full offset. World Steel Association expects YoY flat demand in 2024 and a decline of 1% in 2025 for China. Volumes should continue to fall even beyond.

Ex China demand recovery holds key:

Expectation of higher spends towards public infrastructure, decarbonisation and manufacturing in strategic sectors is the key to recovery of World (ex-China) steel demand. India would be a key driver with WSA expecting strong 8% growth in demand over 2024-25. This will be a positive for domestic steel players even as overhang from cheaper imports remains a concern. Global demand recovery would also aid exports from India over the medium term.

Falling RM prices boost spot spreads:

Coking coal prices have corrected from ~US$350/t levels to $240/t over March-April boosting spot spreads despite fall in steel prices. Iron ore prices globally has fallen due to steel demand concerns in China, and domestic prices have followed as well. In terms of incremental capacity addition, analysts of IIFL Capital Services see limited impact led by staggered addition by the large names amid a strong demand growth in India.