The markets started on a strong footing on Monday, despite mixed cues from Asian markets, however, metal stocks are under tremendous pressure. Steel stocks, in particular, faced deep cuts on Monday’s trades after the government imposed export duties, which may prompt steel companies to review massive capacity expansion plans.
The government on Saturday decided to impose hefty export duties on crucial raw materials like iron ore and pellets that are used in making steel. The export duty on all grades of iron ore has been increased from 30% to 50%. Moreover, the government has imposed a 15% export duty on hot-rolled, and cold-rolled steel products from nil earlier.
Major Stocks Plummeted
Within a few minutes of the opening bell, Tata Steel, Steel Authority of India (SAIL) and JSW Steel hit the lower circuit. Most steel stocks tumbled on the bourses on Monday. Nifty metal corrected 7.25%. In fact, even those stocks that did not form part of the index faced corrections.
Metal stocks were already under pressure due to the Russia-Ukraine War. The Nifty Metal Index corrected 15.43% in the past month.
“Export duty on steel is likely to result in higher domestic supplies, thus exerting downward pressure on prices,” said Kunal Motishaw, an analyst at Reliance Securities.
“Domestic steel companies like Tata Steel, JSW Steel, and Jindal Steel & Power are likely to be impacted the most as exports account for 15-28% of overall sales,” he added.
“Domestic steel companies will have to bear the 15% export duty as export contracts are mostly fixed. Also, as demand in the export market has turned weak, this will further aggravate the pressure,” said Kamlesh Bagmar, deputy head of research at Prabhudas Lilladher.
Finance Minister Nirmala Sitharaman in her 2021-22 budget had reduced the customs duty uniformly to 7.5% on semis, flat, and long products of non-alloy, alloy, and stainless steels from 10-12.5% earlier. This benefited Indian Steel Companies immensely and caused a sudden increase in demand.
Here’s what analysts say
Several broking houses have downgraded stocks belonging to the sector. For instance, ICICI Securities has downgraded Tata Steel, JSPL, JSW Steel and SAIL to ‘reduce’. It was expecting an EBITDA increase cycle to play out over the next 3-4 quarters in steel, but the same has been interrupted
ICICI Securities
“Most of the exports of steel/stainless steel will attract 15% export duty now (from nil earlier). We see this as an extremely negative development for the steel sector and expect broad-based multiple de-rating,” ICICI Securities said after the government’s move.
CLSA
“Lower coking coal and iron ore are key concerns with domestic steel prices that are likely to correct,” said the brokerage firm CLSA. It downgraded three major steel counters- Tata Steel (from buy to underperform), JSW Steel (Underperform to sell) and JSPL (from buy to underperform), said CLSA.
Kotak Securities
“The government’s decision to impose a 15% export duty on steel should lead to a significant correction in domestic steel prices (8-10%) given India’s dependence on exports,” said analysts at Kotak Securities.
Edelweiss
“We view the government’s recent notification on duties pertaining to the ferrous sector as negative. Following this, spreads will likely to reduce further; exports would be curtailed; Capex plans likely to be affected as the key points,” said Edelweiss in a note.
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