Is it time to buy steel stocks?

Govt has initiated probe into safeguard duties on imported steel, which may benefit domestic players

Steel counters enjoyed a much needed relief rally after news of the government initiating investigation on safeguard duties on steel products hit the market. The investigating agency has put up a strong case for safeguard duties on imported steel.

Under Section 8B of the Customs Tariff Act, 1975 the central government is empowered to impose Safeguard Duty on goods which enter in increased quantities and cause or threaten to cause serious injury to domestic industry producing like or directly competitive goods.

The government has studied the data of steel imports from 2011-12 to the first quarter of the present fiscal to reach the conclusion that prima facie, increased imports of steel products have caused or are threatening to cause serious injury to the domestic producers of steel. It has decided to initiate an investigation and have given interested parties 30 days to make their views known.

 

According to data with the government, the demand for steel in India increased from 2.3 million tonnes in 2013-14 to 2.8 million tonnes in 2015-16. But the incremental demand has entirely been met from imports; domestic players have seen their market share reduce from 45% to 37% during the period. During the same period, profitability of the sector has dipped by nearly 45%.

The domestic industry requested for an immediate imposition of safeguard measures for a period of four years in their application. The domestic industry has also requested for the imposition of provisional safeguard duty in view of steep deterioration in performance of the domestic industry as a result of increased imports of product under consideration.

The development is clearly beneficial for the steel sector but more importantly banks would be breathing easy if these duties are imposed.

In a speech, RBI Deputy Governor SS Mundra said bank loans to the steel sector in India has witnessed a 21% CAGR over the past five years and broadly ranges between 4 to 9% of individual bank’s loan book. Banks’ total exposure to the steel sector stands at Rs 3 lakh crore while the net sales for the companies within the sector also stands around Rs 3 lakh crore with an EBIDTA of Rs 37,000 crore. The level of stressed assets in the sector exceeds 27%. Large capacities are lying idle as global/domestic demand conditions have weakened. Further, the capacity expansion has been done using excessive leverage.

Steel market has already incorporated an imposition of safeguard duty. According to a note by Phillip Capital, steel prices both in long and flats segments have stabilized and have seen marginal increases. Flat product prices are already up by Rs 500?750 per tonne in anticipation of safeguard duty. Long product prices are also up by a similar amount. The sustainability of these hikes, says the note, will depend on safeguard?duty implementation and demand, which currently is weak.

JP Morgan, however, has found another reason to be bullish on the steel sector. According to a note by the research firm, Japanese yen has appreciated by around 4% against the dollar, while the Indian rupee has depreciated by 4%, implying 8% relative depreciation. For the value-added steel products, it would have pricing implications as imports from Japan have surged in these products, with steel imports in the first quarter of current fiscal increasing by around 100 per cent from Japan.

After a long time, the sector has got some wind under its wings. But for long-term sustenance, they would need domestic growth to pick up, which is the major missing portion in an otherwise bullish case.