With raw material costs expected to soften in Q3FY11, steel manufacturers can hope for better times ahead.


The BSE Metal Index has surged nearly 3% in last three days mainly driven by steel sector stocks. Even though volatility in metal prices continues with uncertainty pertaining to global demand scenario, the steel sector has seen some respite on the pricing front.

The reduction in imports with China withdrawing export incentives and the optimism on demand improvement with increased construction activities post monsoon has augured well on the domestic front. This had led to Hot Rolled Coil (HRC) prices increasing from Rs 31,500/tonne in beginning of August 2010 to Rs 33,000/tonne by end - an increase of 5%. While long prices remained stable at Rs 33,000/tonne throughout August, steelmakers have now increased their prices by Rs 1,000 a tonne for the month of September 2010. Flat products too have seen an increase of Rs 1,000/tonne.

These price increments have been forced due to constantly rising input costs. The coking coal contract prices had spiraled in first quarter itself to $200/tonne, up from $128/tonne a year ago. Iron Ore prices too increased from $61/tonne a year ago to $110-120/tonne. With this uptrend, the steel prices had plummeted during Q1FY11 costing steel players dearly. The coking coal contract prices have moved further up to $225/tonne and iron ore prices to $140-150/tonne during second quarter of the current fiscal.

While the price hikes bode well for the steel players, the pace at which we may see further increment in prices remains uncertain looking at global uncertainties. Nevertheless, what brings further respite is expected cooling down of raw material prices in third quarter. Analysts at Ambit Capital indicate that in October – December 2010 quarter, world’s largest iron-ore producer – Vale – is expected to cut iron-ore prices by 10%. Rio and BHP Billiton Ltd are also reported to reduce iron ore prices by 11%. Thus, the iron-ore prices are pegged to remain at around $135/tonne during Q3FY11. Even coking coal prices are expected to soften 7% sequentially in the third quarter of the current fiscal with Japanese steelmakers reporting their secured contracts prices. Thus, coke prices may hover at $209/tone, marking a reversal in continued uptrend of raw material prices that was being anticipated by analysts in the beginning of FY11.

The change in dynamics with some price revisions and prospects of raw material prices’ cooling down has led the analysts upgrade steel stocks. JSW Steel has already been able to source iron ore at lower prices from spot market in second quarter itself.  With Karnataka’s ban on iron-ore exports, the sourced iron-ore prices are at Rs 1,100/tonne, as compared to Rs 1400/tonne earlier.

JSW Steel, Tata Steel and Sail priced at Rs 1177, Rs544 and Rs 192, respectively trade 13.4x, 8.7x, and 11.4x FY11E earnings.