Morgan Stanley Expects Indian Steel Upcycle To Last Into FY23
Morgan Stanley expects the upcycle in India’s steel industry to last into the fiscal ending March 2023, supported by a strong pick-up in demand as well as supply-side reforms undertaken by China-related to reducing emissions. “The current cycle has an element of similarity to both the prior upcycles (after global financial crisis 2009 and supply-side reforms during 2016-18). We see a sharp rebound in steel demand globally (rest of world ex-China) in 2021, supported by a V-Shaped economic recovery,” the investment banking company said in a report. China’s emissions-related reforms, according to Morgan Stanley, will lead to production cuts and exports declining in 2021, which will create supply tightness in the seaborne market. It expects China’s crude steel production to decline 0.3-2.3% year-on-year in 2021, leading to a 30-50-million-tonne drop in exports during the period. A decline in steel exports from China helps reduce deflationary pressure on international steel prices. International steel prices are currently at premiums to domestic prices, providing an opportunity for Indian producers to participate in export markets. India’s steel exports will stay elevated in 2021-22 as producers with excess capacity will fill the gap created by the decline in China exports. As a result, the supply situation in India is expected to remain tight. Industry utilisation rates should improve faster; the volume growth outlook is robust. JSW Steel Ltd. is best positioned to deliver double-digit volume growth, while other larger players will likely run out of capacity. Morgan Stanley upgraded JSW Steel owing to the strongest volume growth and a drop in iron ore prices supporting solid earnings growth. It downgraded Steel Authority of India Ltd. and advised investors to shift to JSW Steel incrementally with strength in the stock price due to potential price hikes. “Our order of preference is Tata Steel Ltd., JSW Steel and Jindal Steel & Power Ltd. within overweight stocks.” Morgan Stanley has increased its FY22 realisation estimates by 1-12%, resulting in a rise in Ebitda estimates across its coverage by 4-35%. “We see scope for upside risks to our estimates and believe the earnings upgrade cycle is likely to continue.” Still, higher-than-expected inflation driving up yields and constraining demand, limited supply disruptions in China and faster-than-expected normalisation of spreads are some of the key risks highlighted by the global financial services provider.
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