Supply likely to exceed in Indian steel
Following strong 8.5% y-o-y (7.6 million tonne volume) growth in Indian crude steel production in FY17, we would focus more on sluggish domestic steel demand, since this would determine further volume/price growth over FY17-20. Expected capex spends in large steel consuming sectors do not lend comfort to support 4.5% CAGR in domestic demand. This is critical to absorb incremental supply of 14mt, even assuming PSUs deliver 50% of our base-case volume estimates and net exports sustain at current levels. This would limit pricing gains for steel producers, especially if JSW Steel and Tata Steel operate at desired maximum utilisation, given their lower costs. Although we remain positive on both, sustained healthy demand growth would be the key to stock price performance from here on. We estimate 20 mt of incremental domestic steel supply over the next three years. Out of this, 11 mt could be delivered by PSUs viz. SAIL, NMDC, and RINL, if they are able to ramp up their upcoming capacity. There have been repeated delays during construction, commissioning and ramp-up of new steel capacities by these PSUs in the past few years and further delays cannot be ruled out. Even assuming these PSUs are able to deliver only 50% of their expected incremental volumes; domestic steel production would increase by 14 mt by FY20, implying 4.6% volume CAGR over FY17-20. If PSUs deliver 75% of base case estimates, production CAGR would increase to 5.4% over FY17-20. Beyond 2020, there is a visibility for JSTL’s expansion at Dolvi (5 mtpa to 10 mtpa) and Tata Steel’s Kalinganagar Phase 2 (3 mtpa to 8 mtpa). These two projects would alone add 8-10mt over FY20-25. Domestic steel demand remains subdued. India’s finished steel consumption growth was a modest 3% during FY17, much lower than the earlier expectation of 6-7% growth. Steel demand growth remained low at 3.4% in April and 1% in May. In the absence of a recovery in domestic steel demand, selling incremental production would be a challenge in the near term since avenues for further increasing exports would be limited and import substitution has largely played out.
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