2022 was a good, but volatile year for commodities. Every other commodity saw a steep rise in prices in the first half, followed by a massive decline in the second half.
Following the general theme, it was a volatile year for steel prices too; first a rise because of international trade agreements, and supply issues caused by the Russia-Ukraine conflict, and then a fall led by China’s zero-tolerance policy, Europe’s energy crisis, and worries of an economic slowdown.
But despite the volatility, steel stocks performed quite well. Jindal Steel & Power, Jindal Stainless, JSW Steel and Tata Steel were among the strong performers, all clocking double-digit returns.
While 2023 has started on a softening inflation note, here are 4 reasons that might just make the steel sector perform well this year too:
1. Steel Consumption Has Been High While global output was dismal in 2022, India was shining bright. According to CareEdge Research, India’s steel consumption grew by 11.5% from April to December 2022, compared to last year.
The infrastructure sector and policy support by the government pushed up domestic demand. With a continued push on CAPEX and infrastructure, these trends are likely to continue into this year as well.
2. Export Demand To Rise in 2023 An export duty of 15-50% was imposed on steel products from May 2022, which resulted in exports halving from April to December 2022, compared to last year.
However, in November 2022, the duty was lifted on steel products and reduced on iron ore lumps and fines, and pellets. These steps should result in a tailwind for the sector in the near to medium term.
3. China is Coming Back While the West is facing a severe economic slowdown, China is on the verge of making its way back up. With borders reopening, COVID norms being relaxed, and a push being planned for the economy, China’s steel consumption is expected to start rebounding.
China’s resurgence makes a larger difference in steel demand and prices compared to the West given that it consumes nearly half the world’s steel
4. Higher Input Costs Will Push Prices Higher International steel prices are also expected to remain elevated because of high raw material costs. The two major components for any steel producer are iron ore and power.
The ongoing geopolitical crisis and subsequent supply chain disruptions have been pushing the prices of iron ore and coking coal high; which makes a case for steel prices to see continued upward pressure
Risks To The Thesis:
The global slowdown might just affect export demand if China doesn't happen to resurrect fast enough in 2023.
Any risk to demand could put downward pressure on prices, which can bring margins down when raw material prices are still elevated.
Steel companies have been adding capacity aggressively, which can lead to higher supplies, lower capacity utilisation and lower prices.