Why events in China are sparking a rally in Indian steel stocks

A 10 percent drop in iron ore prices recently has led to a rally in steel stocks today.Tata Steel is up 1.2 percent, while SAIL has gained 2 percent. JSW Steel also notched up a 1.6 percent gain.

Iron ore prices have dropped on the back of a slide in the Chinese manufacturing index, indicating lower demand from the world’s largest consumer of iron ore.

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Iron ore is a key input for manufacturing steel and a drop in prices will bring relief to steel companies.

Given that Chinese steel makers continue to bargain for lower prices, the expectation is that steel companies have more scope to benefit.

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That view is also gaining support from analysts.

Akira Kishimoto of JP Morgan noted that steel demand has stagnated due to slowing investment growth. This year, growth in demand could be as low as 3 percent compared with last year.

Nevertheless, Indian steel makers like SAIL, Tata Steel and JSW are going ahead with their capacity expansion plans.

The report said the plans of the top five steelmakers alone will double their combined capacity over the next four years.When that happens, India will turn into a net exporter of steel. Currently, it is a net importer.

If India eventually did become the hub of Asia’s steel exports, that would definitely threaten other East Asian steel players, the JP Morgan analyst added.

Nomura Research pointed out that after the recent correction in stock prices of steel companies, the markets are factoring in prices of $550 per tonne.

At these prices, World Steel Dynamics, a global industry body, noted that most steel makers would become unprofitable. Therefore, such low steel prices are unsustainable. As a result, stock prices in Indian markets are not expected to fall much further.

The brokerage prefers stocks like Tata Steel and SAIL, which have captive supplies of raw materials.