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Steel: Input cost-led price rise to be fleeting if China doesn’t return

Supply disruptions are anathema to commodity markets. Steel prices on the London Metal Exchange rose as much as 10% after an accident at a Brazilian mine hit iron ore production.

The accident and the resultant regulatory action could affect 70 million tonnes of iron ore production, amounting to 5% of global imports. These concerns drove up iron ore rates, lifting steel prices in international markets. Tracking the gains, prices in India perked up, too.

Analysts expect the Brazilian regulator to tighten mining norms, restricting exports from the country in the interim. This could keep iron ore prices high. Domestic integrated firms such as Tata Steel Ltd and Steel Authority of India Ltd, which have captive iron ore mines, stand to gain.

Further, iron ore supply disruption is expected to hit Brazilian supplies of pellets. Refined from iron ore, pellets are used in blast furnaces in producing steel. Supply constraints could benefit Indian pellet exporters such as Godawari Power and Ispat Ltd, and Jindal Steel and Power Ltd. Channel checks by Edelweiss Securities Ltd shows a notable increase in pellet prices. One export deal shows a 13% markup in prices in a month, says the broking firm.

Unsurprisingly, share prices of certain companies gained 7-22%. But, how long this will sustain is the question.

Beyond the cost-led price rise, steel demand has not improved. Softening demand in China persists. Inventory restocking after the holiday season could boost prices in the short term. However, a slowdown in the real estate and automobiles sectors, the large users of steel, could eventually lead to anaemic prices, warn analysts at Kotak Institutional Equities. There is also the worry that a continuing slowdown in demand could raise exports from China, further weighing on prices in international markets.

Of course, steady demand in India should be good for domestic manufacturers. But that offers little reassurance. Demand for higher-priced flat steel products has been slackening, reflecting softening sales in user industries such as automobiles.

Further, surplus iron ore production in India could contain sustained cost-led steel price rise in the domestic market, limiting gains for integrated steel producers.

According to ICRA Ltd’s calculations, domestic iron ore supplies are estimated to exceed demand this fiscal year and the situation is unlikely to change in FY20. As a consequence, companies without captive iron ore mines can remain competitive. This puts the onus on a significant demand recovery, notably in China. “Notwithstanding the boost in near-term earnings, we expect steel prices to weaken later in 2019 and impact FY20 earnings,” add analysts at Kotak.
Source: Live Mint

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