In a global trade war, India's steel companies are better placed

Supply cuts in China mean better prospects for domestic players; macro issues to weigh on non-ferrous players

The nervousness around domestic metal stocks has aggravated recently, with an escalating global trade war. Experts believe non-ferrous metal prices will see higher volatility, led by a strengthening dollar and a sluggish economic scenario in China and Europe, while the ferrous (steel) sector is better placed. 

For India's steel sector, prospects remain better, led by domestic demand, an import duty cushion and consolidation. Prices in the domestic market, which had continued to rise since November, might soften a bit due to onset of the monsoon, when construction activities get slow. But, it is seen as a temporary hiccup and prices are expected to catch up, supported by strong demand. The strengthening steel price and production cuts in China are a comfort booster.

Analysts say the Chinese government's three-year environmental blueprint raises prospects of wider curbs on its steel production. China is intensifying its autumn and winter environmental efforts to curb production in more cities, suggest analysts. They say it could affect half its steel sector and, hence, cuts are likely to be higher than last year. 

Lower Chinese production reduces the threat of cheap import into India, while rising steel prices in China bode well for Asian and Indian steel makers.

Analysts at Emkay Research thus expect prices to remain strong. Production growth for steel in China is likely to remain sluggish in July and August because of the monsoon, while government inspections due to environmental concerns will create constraints in resurgence of scrap-fed induction furnaces, they add. 

The impact is visible, as Motilal Oswal Securities' July 16 weekly report on metals shows Chinese local hot-rolled coil and rebar prices rising due to concerns over supply cuts.

Thus, experts believe prospects for India's steel producers remain firm. Tata Steel and JSW Steel remain among top analysts' picks. SAIL and Jindal Steel & Power, which are witnessing a turnaround, led by improved realisations, have also expanded capacities. A firm pricing outlook would add to the gains. 

Meanwhile, during the June quarter, steel companies are expected to outperform, with 74 per cent year-on-year growth in operating profit due to higher volumes and realisation, say analysts at Motilal Oswal.