Credit Suisse’s Contrarian Call On Steel Sector

When most brokerages expect a tough time for steelmakers, Credit Suisse has taken a contrarian view.Credit Suisse expects domestic steel spreads to improve, driven by two factors:Lower domestic iron ore prices as production continues to rise ahead of the licences expire in March 2020Increase in Chinese steel prices as the mills go into the seasonally strong August-September quarter while smelting spreads in China trade close to multi-year floor.Brokerages including Jefferies, Edelweiss Securities, HSBC, Goldman Sachs, however, expect steel spreads to weaken. And they attribute their forecast to a weak global economic forecast, slowdown in auto and real estate demand and higher steel production in China that’s expected to keep global steel prices under pressure.Credit Suisse said cheaper local iron ore will aid the spreads. And the brokerage doesn’t see local steelmaker cutting prices even as a supply glut has made raw material cheaper. And it also expects Chinese steel prices to rebound as they trade near multi-year floor but enter the seasonally strong August-September.But Goldman Sachs, in a report, said Chinese steel margins to further reduce in second half of 2019 due to deceleration in construction and increased production.Here’s what other brokerages say:Goldman SachsTurned more bearish on Indian steel sector.Sees pressure on outlook for spreads due to slowing global steel demand.Heightened rhetoric around trade war concerns, elevated iron ore prices to weigh.Expects domestic iron ore prices to pick up in Q1FY21 after expiry of licensesPrefers integrated steel mills as ore availability remains uncertain.HSBCCut FY20-21 Ebitda estimates by 10-11 percent for the sector.Sees rising risks for the sector due to weak automotive demand, trade war concerns.Expects likelihood of iron ore supply easing globally and China steel output rising.JefferiesRegional steel prices to stabilise but margins to remain under pressure.Domestic steel prices still at a premium to import parity.Auto slowdown and issues in real estate sector affect domestic steel demand.Domestic iron ore prices may edge higher due to higher iron import prices.Edelweiss SecuritiesAnticipates challenging times due to higher imports and pressure on realisations.Heightened risks on imports due to unabated production growth in China.Lack of export avenues might intensify domestic competition..Shares of steelmakers are down 5-15 percent so far this year, with JSW Steel Ltd., a non-integrated company, losing the most. JSW Steel has seen sharper downgrades than Tata Steel..

Credit Suisse’s Contrarian Call On Steel Sector

Credit Suisse expects domestic steel spreads to improve, driven by these two factors...

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Credit Suisse’s Contrarian Call On Steel Sector

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