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Materials

Tata Steel, JSW Steel may see further value erosion amid weak India demand

The shares already lost about third of their value this year

Shares of Tata Steel have fallen almost 30% so far this year, while that of JSW Steel lost 26% in Mumbai trading.    © Reuters

MUMBAI (NewsRise) -- Shares of Tata Steel and JSW Steel could face further erosion amid weak demand at home and falling global prices after India's top steel makers already lost about a third of their value so far this year.

The weak domestic demand comes as Asia's third-largest economy grapples with a slowdown amid tighter liquidity conditions that sap availability of credit. India's gross domestic product expanded at the slowest pace in almost six years between April and June. Automakers such as Maruti Suzuki India have cut production and fired thousands of workers in recent months after demand for cars and SUVs slumped. Investor pessimism has been further fueled as the prolonged trade war between the U.S. and China damped the outlook for the global economy.

Shares of Tata Steel have fallen almost 30% so far this year, while that of JSW Steel lost 26% in Mumbai trading. Shares of state-backed Steel Authority of India slumped more than 40%. In contrast, the benchmark S&P BSE Sensex has gained 3.7%.

"We retain our cautious outlook on the sector with slowing consumption growth exacerbating the situation," Edelweiss said in a report on Thursday. "We perceive considerable risk to consensus estimates for ferrous players as the prevailing low prices are still not reflected."

Domestic steel prices have fallen 13% since January as seasonally weak construction activity, rural slowdown, and a weak automobile sector weighed on demand. Automobile demand in the south Asian country has been falling since July last year.

According to Edelweiss, domestic hot-rolled coil steel prices, on an average, slumped 22% in the second quarter, breaching the 37,000 rupees ($520)-per ton level for the first time since August 2017. The weak demand has pushed domestic producers to offer steep discounts on headline prices, while traders sought to cut prices to clear inventory.

Further, a sharp fall in the prices of raw materials such as iron ore and coking coal has diminished the chances of a price increase for steel producers. Iron ore prices have fallen 28% from their peak earlier this year, while coking coal is down 27% in the past three months.

CLSA warns that there is "more downside" to steel stocks as "hopes of a cost-push rally in steel prices are fading with the recent fall in iron ore and coking coal prices." The brokerage cut its earnings estimate for Tata Steel and JSW Steel by 10% to 15% for the fiscal year 2020 and 2021.

Last month, Moody's Investors Service warned that the operating earnings per ton of Tata Steel's Indian operations may decline by a mid-single-digit percentage over the 12 months to June 2020, while that of JSW Steel may drop by 13%.

On Thursday, HSBC Securities cut its target price on Tata Steel to 410 rupees a share from 520 rupees. It cut the target price for JSW Steel to 220 rupees from 270 rupees, and SAIL to 30 rupees from 57 rupees a share previously. Shares of Tata Steel gained 0.8% on Friday to close at 367.25, while that of JSW Steel closed 1.8% higher at 226.20 rupees. SAIL lost 0.2% to close at 33.75 rupees.

In the quarter ended in June, Tata Steel saw its profits plunge 63%, while JSW posted a 57% slump in earnings. However, analysts expect the declining costs to help improve the margins of steelmakers in the third quarter, due to the lag between purchase and consumption.

Meanwhile, the ongoing Sino-American trade war has triggered fears of India turning into a fertile dumping ground for cheap imports, especially from China. At the end of March, India had turned a net importer of steel after a brief hiatus of three years. According to a Reuters report in May, the industry urged the government to put additional safeguard levies of as much as 25% to protect it from growing imports.

While India has already imposed a slew of anti-dumping measures to protect the industry, analysts say such a possibility is unlikely. "We do not expect an import spurt as domestic prices remain below the anti-dumping duty level," Edelweiss said.

--Dhanya Ann Thoppil

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