As prospects of Chinese steel demand decline for 2019 become more acute, Indian steel players are re-discovering the perils of high leverage in a deep cyclical sector.

Historically, premier players like Tata Steel and JSW has been pushing hot-rolled coil (HRC) into the domestic market through subsequent expansions while undertaking measured CRC (cold-rolled steel) investments and hoping for the same to get domestically absorbed.

But there is a real risk emerging that the Indian market may be getting saturated in its ability to absorb the same. FY18 witnessed, for the first time in the last 14 years, India turning to a net exporter of both HRC and CRC – the trend continues. This trend is also resounding with the latest JPC data of relative weakness in the overall flats demand in the country, a trend that can easily exacerbate in the coming years.

Hence, when we witness the strategy of Indian steel players of subsequent expansion based on first HRC followed by some measured CRC capacities, perhaps a discounted value on landed price (similar to what prevailed prior to 2004) is what is about to start getting into practice.

This will have negative margin implications for Tata Steel and JSW and we remain cautious on both and reiterate ‘hold’ rating on them.

Demand of long products (including GP/GC applications in structurals) remains robust. Yet, one can never stop worrying about impact that lower scrap prices may bring. What we have seen though is a much faster correction in re-bar prices domestically than what imported scrap prices would have dictated.