Tata Steel prices heat up, hit by cost of coal

The biggest concern is the recent pressure on steel prices, triggered by weak demand from China. Steel prices in China have started falling, which means that prices in India will also follow. Given that Tata Steel’s stellar performance was mostly due to a jump in steel prices, the decline is disappointing.

The November 22 Nomura Global Equity Research Report on Weekly Trends indicates that Chinese steel prices continue to decline, while Indian trade prices are also under pressure from domestic prices above import parity. During the week ended November 19, Chinese hot rolled coil (HRC) prices declined week-on-week by $30 a tonne to $780 a tonne as demand conditions remained weak. Indian HRC prices also fall 1,000 per ton week-on-week Channel inventory remains high at 71,000/tonne, and consequently restocking demand remains weak.

Further, with weak exports and domestic steel prices being at a premium to parity prices vis–vis imports, domestic mills may resort to higher price cuts. In a November 24 note, analysts at Kotak Institutional Equities said, “Domestic steel prices are at a record premium to import parity after a 20% fall in Chinese prices in the past one month.” He expects steel mills to cut domestic prices by 5-10%. in the coming months.

Not surprisingly, the market is cautious about Tata Steel. Domestic operations continue to be a key growth driver for the company. The company’s standalone performance in the September quarter benefited from better steel prices. Standalone revenue increased 18.1% sequentially and 50.8% year-over-year. The company’s per tonne profitability also improved from 30,739 11,965 in the year-ago quarter.

However, on the other hand, the profit per ton has declined due to rising prices of raw materials like coking coal. 32,712 in the June quarter.

Not just India, Tata Steel’s European operations also benefited from higher steel prices and better mix during Q2 FY22. Tata Steel Europe sees EBITDA per tonne more than double from 15,609 6,590 in the previous quarter. Analysts say the improvement could have been more but for higher raw material costs, especially coking coal as well as energy costs.

Given that European operations are dependent on external supplies of raw materials, the December quarter may see further heat. Analysts at Centrum Stock Broking have slashed Tata Steel Europe’s EBITDA estimate by 35% for FY12.

For now, steel demand in India remains strong. Tata Steel saw steel deliveries grow 11% sequentially in the second quarter, despite a slowdown in demand due to seasonal weakness. It had recorded its highest ever quarterly sales in the infrastructure and engineering segment with 19% sequential growth in the second quarter. The demand for flat steel remained strong and the company got approval from a leading OEM to supply flat steel for new SUVs. Flat steel demand in Europe is also set to improve as automobile manufacturing picks up with chip shortages gradually easing.

Global steel demand is expected to grow 4.5% in 2021 supported by economic recovery, while European steel demand is expected to grow at a faster rate of 12.7% year-on-year. Detail would also help.

Tata Steel’s 5 MTPA Kalinganagar Phase II expansion is driving value addition in India. Cost savings are expected from the 6 MTPA Pellet Plant and the 2.2 MTPA Cold Roll Mill Complex will enhance the product mix.

Has shrunk to a lighter balance sheet with gross debt 78,163 crore at the end of the first half of FY22 is also positive.

Ergo, analysts are in no hurry to downplay expectations from Tata Steel. People in Kotak said steel stocks are likely to remain under pressure in the near term amid weakness in steel prices, but the risk-reward from the one-year outlook remains attractive for manufacturers like Tata Steel.