Tata Steel and JSW Steel, India's top steel producers, expect earnings to fall in April-June as overproduction in China and falling global prices worsen the industry's near-term outlook.
Analysts say Indian steelmakers' concerns are exacerbated by continued weak demand from the auto and real estate sectors, as well as cuts in government spending on infrastructure projects ahead of the federal elections in May.
Asian steel prices have been falling since September amid a protracted trade war between the US and China and weakening global economic growth. Fears are growing that for the first time since 2008, the global economy may fall into recession, leading to a decline in demand.
“We see a risk of our estimates dropping below consensus,” the CLSA said in a Monday report. Tata Steel and JSW Steel's consolidated fiscal 2020-2021 earnings estimates have been cut 13-21% over the past six months, the brokerage said in a statement, adding that its own estimates are still 24-31% below market expectations.
Concerns about global growth and strong steel production in China remain a "hangover" for the sector, according to CLSA, reaffirming their sell-off ratings for both Tata Steel and JSW Steel.
Following a record 8 percent sequential decline in steel prices in the fourth quarter, Tata Steel said in May that it expects the domestic price to rise in the current quarter amid a global rebound and higher spending following the Indian federal elections.
However, with no immediate resolution of the Sino-US trade dispute expected, China is selling excess steel production in markets outside the US, including Cambodia, Vietnam and India. Dumping has slashed hot rolled coil prices in India by 4% YTD.
As cheap imports rise, the world's second largest steel producer has become a net importer in the fiscal year ending March for the first time in three years.
Last month, Fitch Ratings warned that Tata Steel and JSW Steel's operating margins are likely to contract this fiscal year as steel prices continue to decline. Lower margins could lead to higher leverage ratios for JSW Steel and Tata Steel as they have plans for large-scale expansion of capacity domestically.
Of course, Fitch said it does not expect a sharp contraction in the sector, as it sees "restrained" exports from China, supporting the global steel sector.
