Title: Steel sector stocks look very attractive now, says Equirus Securities’ Satish Kumar
However, Kumar advises caution as the volatility in the sector is high.
Steel stocks have fallen in the range of 15 to 40 per cent year to date due to the declining steel prices and recent slowdown in the demand. In an interview with BusinessLine, Satish Kumar, Head of Equity, Equirus Securities, said that the investors can consider buying steel stocks at the current levels as the valuations are cheap. However, he reiterates that the investor should have the risk appetite to sustain the volatility. Excerpts:
What is your outlook on global steel prices?
I believe that the steel prices are determined by three factors — supply from China, supply from Black Sea exporters and the currencies of these supplying countries.
Firstly, the supply of steel from China hasn’t come down as expected, globally. Though the growth in exports from China has largely been flat in the first six months of 2019, when compared to the previous year, it is likely to increase in the next half of the year.
Secondly, any increase in supply from Black Sea exporters such as Russia and Ukraine, who are the integrated players producing steel at lower cost, have an impact on steel prices. Needless to say, in an international market, incremental supply at reduced cost matters the most, and could result in the fall in prices immediately.
Further, if the currencies of these countries devalue against dollar, then the cost of production of the suppliers in these countries, in dollar terms, comes down. This gives them the headroom to produce more and export more.
China has already let its currency devalue against dollar. And, if the cost of crude comes down further, the value of currencies of Black Sea exporters’ are also expected to fall.
With the incremental supply in the market at competitive prices, suppliers from other countries are also forced to bring down the prices. These instances, I foresee, would be exerting pressure on the steel prices globally. But I don’t see the scenario of 2015 (when the prices fell sharply) repeating. 10 per cent more decline from the current price levels is possible in the short run.
How is the global demand for the metal now?
There is a slow down now, which is very apparent, and everybody recognises that. Hitherto, steel companies expanded the capacities and produced more in the expectation of demand. Now, the inventory levels are high. Around 40 to 45 per cent of the steel remains in the supply chain.
But now, the demand is weak, and expectation of demand in future is also weak, keeping the inventory levels high. The World Steel Association (WSA) also seconds the weak demand prospects for the metal.
Where do you think we stand in the steel cycle now?
Naturally, the steel cycle should bottom out soon. In terms of steel cycles, the sector was bullish starting 2010 until 2012-13, when the bearish phase begun. It later recovered and saw a big decline again in 2015-16. Slowdown in that year recovered quickly with a bullish phase, till the beginning of the second quarter of this year. Now, again, I think, that the steel sector is bottoming.
What is the outlook for Indian steel industry?
In the short term, the next two to three quarters will be really painful for steel producers. Metal prices, sales realisations and profits are expected to go down. Besides, prices of iron ore, the key raw material of steel, could remain high due to the supply disruption at Vale.
In the long run, the demand looks good on account of expected infrastructure spends.
Will the current auto sector slowdown in India impact domestic steel demand?
I am not very bearish on auto sector. I know a lot is said about the auto sector slowdown, but this is a cyclical. Demand in the sector will revive and I’m not worried. All these together will impact the profitability margins of the steel players in the near future.
Do you recommend investing in steel stocks now?
In the ferrous and non-ferrous metals space, steel stocks look very attractive. I think the steel stocks would be very close to bottom as of now.
Valuations look very cheap, and this is the scenario when the investor should consider buying a stock. But again, it is upon the individual’s risk appetite, as the volatility in the commodities space is very high.
The steel stocks can fall further by 20 per cent not only due to the uncertainties in the sector but also weak economic activity, liquidity issues, psychological sentiment etc. But if you hold it for two three years, one can surely make the money beating the market returns.