If history repeats itself, steel sector is in for severe pain in next 1 year

If 2008 is any cue, the steel sector could be in for severe pain in the next one year.

The government this past weekend imposed hefty export duties on crucial steel-making raw materials like iron ore and pellets.

Export duty on iron ore has been hiked to 50 per cent across all grades from 30 per cent for lumps, while that on pellets has been imposed at 45 per cent from nil earlier, making exports unviable.

Further, the government imposed a 15 per cent export duty on hot-rolled, and cold-rolled steel products from nil earlier.

The development, seen as extremely negative, has brought in broad-based multiple de-rating for the sector stocks.

Brokerage Prabhudas Lilladher said the event reminds it of 2008 when the then UPA government imposed export duty to curb inflation as steel prices had crossed $1000 per tonne in wake of massive global liquidity and strong demand.

While, duty on flat steel products in 2008 was withdrawn in a month’s time as steel companies agreed to government demands to reduce prices, said Prabhudas Lilladher, the sector went into severe pain in the next one year due to global meltdown.

"Hence, global demand is the key as steel companies would continue to maintain their volumes in exports (15-20 per cent of total shipments) with a hit of 15 per export duty to balance prices and supplies in the domestic market. Admittedly, it is very difficult to link the dots with past events given the ultra-volatile market conditions. But, it is very evident that odds are more inclined towards weakness due to likely sluggishness in global demand and prolonged stay of export duty in case of revival in Chinese markets," it said.

The brokerage has downgraded its steel sector to underweight and cut its target price of its coverage universe by 20-55 per cent in line with a similar cut in earnings.

downgraded , , and to reduce. This brokerage was expecting an Ebitda increase cycle to play out over the next 3-4 quarters in steel but now the same has been interrupted, it said.

"We were thesising that steel equities would probably be bottoming out at 1 time PB, given the substantial improvement in balance sheet and the increase in through cycle profitability given removal of export rebate out of China. The current policy direction would take away the advantage (for at least next 1 year) and meaningfully impair the bottom P/B of 1 time argument for the steel equities in the impending downcycle," it said.

CLSA too has cut its estimates across steel company coverage and downgrade all three stocks: Tata Steel, from Buy to Underperform, JSW from, Underperform to Sell, and JSPL, from Buy to Outperform.

said it expects a near-term adverse stock reaction of up to 15 per cent on the ferrous stocks with stainless steel players and ones with significant operating leverage such as SAIL bearing the brunt. It remained relatively positive on Tata Steel as TSE would not be impacted by the GOI’s notification.

At around 2 pm, shares of Tata Steel were trading 11.88 per cent lower at Rs 1031.15. JSPL was down 15.97 per cent at Rs 402.40. JSW Steel tumbled 12.36 per cent to Rs 552.90 while SAIL lost 10.18 per cent to Rs 74.55.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)