JSW Steel is far from regaining its sheen

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The imposition of export duties results in lower shipments’ realisation. Nonetheless, JSW Steel will continue to export 15-20% of its output in FY23 in order to maintain long-term customer relationships.

JSW Steel shares have dropped nearly 11% since the government imposed steel export duties on May 22. This, combined with boring international prices, has resulted in a significant correction in the domestic price of this commodity.

Domestic hot-rolled rolling prices fell 20% from peak levels in April to 63,100 per tonne on June 8, according to SteelMint.

“Management expects price declines to stabilise unless charcoal costs fall from current levels of around $ 400 per tonne,” Nomura Financial Advisory and Securities (India) analysts wrote in a June 13 report. JSW Steel was hosted by the brokerage at the Nomura Investment Forum.

However, the imposition of export duties results in lower shipment realisation. Despite this, the company plans to export 15-20% of its production during FY23 in order to maintain long-term customer relationships.

“With exports accounting for 15% of management’s sales estimates, total net realisation of steel may be affected by 2.0-2.5 percent for FY23F,” according to the Nomura report.

However, the softening of cost of raw materials such as coking coal and iron ore provides some relief. This impact, however, is anticipated to be reflected in the lagging finances. As a result, the company expects Ebitda (profit before interest, tax, depreciation, and amortisation) per tonne to stabilise beginning in Q2FY23.

On the demand side, the upcoming monsoon season may cause a slowdown in construction activity, weighing on steel demand. On the other hand, demand from the automobile industry remains strong, with increased traction for both cars and commercial vehicles.

The company expects utility inventories to rise in H1FY23, but channel inventories to be softer in the short term due to weak demand. When prices stabilise, it is expected that purchases will resume in the latter half of June.

Simultaneously, the goal is to increase brownfield potential to USD 400 per tonne, which is significantly lower than the global replacement cost of USD 1,000 per tonne for steel mills.

“We believe that management’s focus on relatively low-cost brownfield expansion, digitization, and other cost-cutting measures will structurally increase profitability,” according to the Nomura report.

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