Indian steel sector in midst of multiyear upcycle – Goldman Sachs

8 January 2018

Goldman Sachs in a latest report said “We believe the Indian steel sector is in the midst of a multi-year upcycle driven by higher spreads (on improving global steel dynamics), rising domestic capacity utilization and improving iron ore supply. This upcycle, led by supply discipline in China, is likely to see strong steel prices but lower input costs. Steel mills with low raw material integration are better positioned to leverage the dynamics vs fully backward-integrated players, in our view. We initiate on JSW Steel with Buy (16% potential upside) and Tata Steel with Neutral (6% potential upside). We estimate ROEs for these companies to rise 600bp-725bp over FY17-FY20E.”

It said “The dynamics of the Indian steel industry are evolving rapidly with: (1) spreads rising 50% in the past year and likely to remain strong driven by robust global spreads; (2) Capacity utilization rising with pickup in demand, and limited capacity adds till the resolution of stressed steel assets; (3) Domestic iron ore supply improving further with increase in production caps and auction of mines. We believe these trends are likely to benefit both larger steel mills as well as the secondary steel sector.”

It added “With China embarking on a long journey to reduce annual emissions, a new supply discipline is emerging which is likely to be sustained over years to come. On the back of environment-related supply elimination by the government, our China metals research team expects the capacity utilization to remain stretched over the near-medium term. Consequently, elevated steel prices in India, along with softening input costs, are likely to drive higher profitability for the sector.”


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