Will the new steel policy benefit manufacturers?

Steel player's prospects remain strong helped by firm realisations and lower imports

The government's National Steel Policy aims to grow India's steel production by almost 2.5 times from current levels till 2030. The policy also attempts at providing impetus to domestic steel demand by ensuring use of domestic steel for government infrastructure projects.

The street is gauging the benefits that will accrue on demand and production growth.

On demand side, imports have already been curbed to a large extent by protectionist measures as minimum import pricing (MIP) and other duties (ant-dumping, safeguard, etc) were imposed by government starting February 2016. The imports currently stand at about 8-9 per cent of steel demand and within this, long products used in infrastructure projects are about 10 per cent of imports. So, the latter accounts for than one per cent of overall imports, say analysts.

Further, most of the public sector projects have been already sourcing steel locally, and it is incremental demand from government infrastructure projects that will drive growth. The same, however, remains factored into sentiment and estimates, and it is the faster implementation that can drive benefits, said an analyst at a domestic brokerage.

Analysts at Jefferies believe that the impact on demand should be small as steel imports have declined sharply due to protectionist measures and most of the steel for the public sector is already sourced from domestic steel companies (especially SAIL).  

Also, the approved policy only provides preferential procurement rather than mandatory sourcing, which may be due to concerns around potential violation of WTO norms, say analysts. Government has set minimum value addition criteria of 15 per cent for steel products for qualifying as domestic steel and while there were talks that it will be making local steel sourcing mandatory, the approved policy only provides preferential procurement rather than mandatory sourcing, says Jefferies.

It is thereby not surprising that the stock prices of major steel producers such as Tata Steel, JSW Steel, Jindal Steel and SAIL, which opened with good gains on Thursday, ended the day just 0.4 - 0.6 per cent higher.

On steel production, the plan to have capacities of 300 million tonnes (MT) by 2030 from currently about 125 MT, seems ambitious, say analysts.

Meanwhile, prospects of domestic steel players remain strong on the back of improved realisations. International prices too remain firm and growing China consumption coupled with capacity closure bodes well. Analysts at Deutsche Bank say that domestic steel prices are now largely delinked from global steel price volatility and have been much more resilient since February 2016 when policy support commenced. A combination of strong regulatory measures by the Indian government – will continue to provide a floor to domestic steel prices in the event of global steel price weakness, they add.

On Chinese capacities, analysts at Phillip Capital say that 100-150 MT of steel closure is a conservative estimate – closures could exceed 200 MT and Chinese government’s strong emphasis on controlling leverage means sustenance of prices is prerequisite to reduce leverage by many Chinese companies.

Amongst stocks, while JSW Steel remains the preferred pick of most analysts, Tata Steel too is seen benefiting and can see more gains as European operations get further streamlined.