IIFL Securities in its latest note said it would prefer to remain on the sidelines in the case of steel sector after a sharp correction in the domestic steel prices over the past couple of months, thanks to elevated Chinese steel exports of around 100 mtpa at lower prices. In the prevailing scenario, non-integrated players such as JSW Steel and Jindal Steel (JSPL) are better placed than Tata Steel and SAIL, the domestic brokerage said.
IIFL Securities said domestic HRC (Hot-Rolled Coil) at Rs 48,900 per tonne is still at 7-12 per cent premium to landed cost of imports, pointing to further price weakness in the near term. The gross spread, it said, has been stable so far, supported by fall in raw material prices.
“Analysis of conversion cost indicates FY24 saw moderation for all players led by lower freight and power & fuel costs as well as gains from operating leverage. Incrementally, higher backward integration (for RM), value addition and investments in streamlining logistics should drive further improvement in costs,” it said.
IIFL said while it prefers to remain on sidelines, it likes non–integrated players namely JSW Steel and JSPL. Tata Steel and SAIL benefit from captive iron ore (non market-linked raw material), while JSPL from thermal coal based DRI (Direct Reduced Iron operation) operations, IIFL said.
“Incrementally, freight costs are up but gains on power/fuel will continue and will add to benefits from commissioning and ramp up of slurry pipelines (JSTL, JSPL), pellet plants (Tata Steel, JSTL, JSPL) and gains from ongoing brownfield expansions (Tata Steel, JSTL, JSPL),” it said.
IIFL noted that JSPL has seen reduction in freight cost over past two years (lower exports) while JSW saw an increase likely due to sourcing of iron ore from captive Odisha mines; Tata Steel and SAIL saw some reduction in freight cost in FY24.
Power & fuel costs fell amid lower thermal coal prices with JSPL benefitting the most given part of operations are coal based DRI against blast furnace (BF) for others. JSPL also showed lower raw material costs for this reason, IIFL said.
Going ahead, the focus stays on improvement of cost structure across companies. In the case of Tata Steel, while Shikhar-25 programme continues to drive cost savings, FY25 should see gains from ramp up of recently commissioned 6mtpa pellet plant at TSK, IIFL said.
“TSK should see operating leverage as the 5mtpa phase -2 expansion is ramped up starting 2HFY25. Overall other costs would benefit from merger/amalgamation of multiple subsidiaries,” it said.
In the case of JSW Steel, higher backward integration for iron ore and coking coal will streamline operations, butconversion cost reduction will also be driven by 30mtpa slurry pipeline in Odisha (CoD FY27) as well as planned 8mt pellet plant in Odisha, the brokerage said.
For JSPL, key gains will accrue from higher captive sourcing of both iron ore and thermal coal. Conversion costs will benefit from 200km slurry pipeline to link Barbil to Angul and ramp up of 12mtpa pellet capacity linked to the ongoing expansion to 15.9mtpa steel capacity, IIFL said.