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Chinese spreads have stayed high despite rising Chinese output, due to strong demand. Inventories appear to be bottoming out. Moderation in demand post seasonally strong period may lead regional spreads/prices to ease. Steel prices are likely to moderate: Jeferies Chinese spreads have stayed high despite rising Chinese output, due to strong demand. Inventories appear to be bottoming out. Moderation in demand post seasonally strong period may lead regional spreads/prices to ease. This coupled with seasonal slowdown in domestic demand should weigh on domestic steel prices. With steel margins near peak & valuations at 7.7/8.6x FY19e Ebitda, we maintain UPF on JSW/SAIL. Retain Hold on Tata, as risk reward appears balanced. China output elevated; demand steady; exports +48% from Jan lows CISA average daily crude steel output fell slightly to 1.95 mn tons end May vs. 2 mn tons mid May, but this still implies est. annualised output run rate of over 900 mn tons. Yet, Chinese steel inventories (steel mill, traders) fell 15% in May to lows led by (i) steady demand growth and (ii) pick up in exports. Spreads at record highs, but should moderate Chinese mill spreads have rebounded from recent March lows to record highs of over $160-170/ton, +3 std. dev vs. avg of $45/ton. Chinese steel demand picked up in April, May after a slow start to the year. However, construction activity seasonally peaks in May. Broader property indicators continue to moderate. Stimulus appears to be fading. On the supply side, Chinese steel output remains elevated. Steel inventories though at low levels appear to be bottoming out. This could edge higher in coming weeks. Traders inventory appears to have limited linkage to Chinese steel prices, but inventory cycles have influenced spreads in the short term. Chinese environmental checks may be supportive, in short term China has launched environmental checks (end May to early July) across 10 provinces incl. steel making provinces of Hebei, Henan, Jiangsu (52% of China output) to review corrective measures taken w.r.t violations found last year. Several EAF/induction furnaces have reportedly suspended output ahead of upcoming inspections. Supply disruptions due to these checks may be supportive, but these would normalise after checks are completed. Expect prices to moderate Strong demand has helped, but elevated import parity due to high FOB offers from FTA countries and weaker INR have been the main drivers for higher domestic steel prices in recent months. Premium of import offers (CFR India) from FTA countries (0% duty) over Chinese offers (12.5% duty), which usually is $20-30/ton rose to over $70/ton in March, affecting the competitiveness of FTA imports. This is slowly normalising, with premium falling to $30-40/ton. Potential pullback of regional steel prices and normalisation of premium of FTA prices vs. Chinese import offers should lower import parity, which should weigh on domestic steel prices. Source : Financial Express
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