The Nifty Metals Index is the biggest gainer among the NSE sector indices so far in 2022, up 14%. The ongoing conflict between Russia and Ukraine has pushed up the prices of metals such as steel, aluminum and nickel, and this is reflected in the performance of the index.

Supply chain concerns are a factor pushing up prices, including steel. Ukraine and Russia are big contributors to the global steel supply chain, and production uncertainties and sanctions against it are causing distress. “Russia and Ukraine together produce about 100 million tons of steel per year and export about 37 million tons, or 8-9% of global net trade,” Kotak Institutional Equities analysts said in a report by the March 16.

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Price up

However, Indian steel companies are unlikely to benefit from higher prices as costs have also risen exponentially. Prices for raw materials, such as coking coal and iron ore needed to make steel, are seeing a bigger increase. In fact, analysts have said spot spreads (revenues minus costs) for domestic producers are down and should be reflected in the financials with a lag.

The steel shines

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The steel shines

For perspective, although there is a reasonable availability of iron ore in the domestic markets, India imports the lion’s share of its coking coal requirements. According to Kotak analysts, Russia is the third-largest exporter of coking coal, leading to maximum supply risk. The average price of coking coal this month (through March 18) jumped 34% month-on-month, according to market intelligence platform CoalMint. Additionally, NMDC Ltd, India’s main iron ore supplier, has hiked prices three times so far in 2022.

Indian producers had no choice but to resort to price increases. According to SteelMint, national average hot rolled coil (HRC) prices this month (through March 16) are up 10% from December 2021.

Despite the price increases, HRC spreads declined significantly by 24% in March compared to the February average, said Nomura Financial Advisory and Securities (India) Pvt. Ltd analysts in a March 20 report.

“We note that steel price increases, so far, do not cover the expected increase in costs based on spot prices. However, given the 30-60 day consumption lag, the recent surge of costs would hit businesses in Q1FY23E, while price increases should result in stronger margins in Q4FY22E,” said a report from Kotak.

In this context, companies less dependent on imported coking coal should benefit.

“Among the steel producing companies, Jindal Steel and Power Ltd (JSPL), followed by Tata Steel Ltd, are relatively better positioned as a significant portion of their coking coal requirements come from their own mines. The import requirement is lower than other companies such as JSW Steel Ltd,” said Siddharth Gadekar, analyst at Equirus Securities.

Shares of JSPL (best performing Nifty Metals Index) and Tata Steel have gained 29% and 17% respectively so far in 2022, while shares of JSW Steel are up only 4%.

Meanwhile, export opportunities for Indian producers are a bright spot, with Europe facing maximum disruption from the war as it relies heavily on Russian imports. “Indian exporters have increased their allocations to Europe with recent deals made at $1,200-1,250 per ton cost and freight or an increase of $150-200 per ton week on week. Indian exports to Europe are, however, constrained by import quotas, which could be relaxed as Europe attempts to restrict trade relations with Russia following the Ukraine crisis,” Nomura analysts said. Indian steel export prices on March 1 were up 14% from the December average.

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