The Directorate General of Safeguards attached to the finance ministry has recommended a provisional 20% safeguard duty on hot rolled coil steel, also known as HRC, for a period of 200 days.
When viewed in the right context, this is a positive move for the sector as a whole.
There are two angles to it.
On the one hand, the steel sector has been dealing with an influx of imports from Korea, China, Russia and Japan.
On the other, steel companies domestically have not been having a great time. Companies such as SAIL, JSW, JSPL, Essar Steel and Tata Steel have posted lower EBITDA per ton in the last quarter; in fact it has been consistently falling over the past couple of quarters. This has worsened the interest paying capability as measured by EBIT to interest ratio. For example, JSW Steel’s EBIT to interest has fallen to 1.3 times in the June quarter versus 2.6 times last year. For smaller steel companies, it is worse and they would not be profitable without protection duties.
The safeguard duty is primarily to protect the industry in a very subdued domestic demand situation.
This is certainly good news for the domestic steel companies. Steel prices are quite low in the international market, demand is not strong in the domestic market, and industrial recovery has been quite subdued.
With this move steel companies don’t have to resort to lowering their prices to compete with imports. So while the duty will offer some sort of protection, it will NOT result in a major turnaround for steel companies.
It is safe to say that the worst has been circumvented- prices don’t have to be cut and margin deterioration has been avoided.
The stock prices of steel companies, which were quite battered, are witnessing a relief rally so there may be some bounce back in the short term. But I don’t see any outperformance due to fundamental reasons in the near term since the industry is battling with subdued demand and subdued pricing.
Commodity prices have been very depressed. That normally happens in both the cycles - up or down. At present, the down cycle, because of sentiment and speculative short positions, had actually breached the floor and prices start stabilizing over the past week. News of a probable Chinese stimulus perked up the prices.
The next few quarters should remain challenging. But don’t expect any major outperformance from here.
