In the last year, steel-stock gains have been between 20% and 40%, while the Nifty has gained 9-10%, marking a clear out performance. The strong performance is even more pronounced against a highly-volatile global back-drop, given the trade disruptions, geo-political disturbances and slowing growth.
Everyone knows that Chinese production and exports are the biggest variable in determining steel prices. Hence, anyone that trades or invests into steel stocks needs to have an eye on what China is doing there. Chart 1 shows the impact of Chinese exports on the realisations that steel manufacturers make.
On the face of it, this chart doesn’t look very good. From the lows in 2022, Chinese exports have been rising up steadily into the current year and you can spot that the average realisation has been dropping off steadily.
So, what is making the stocks (I am using the top few names only in this comparison) move higher? The answer is clear: Safeguard Duties. India has levied tariffs or safeguard duty on steel imports on China and Vietnam for the next three years. The tariffs are imposed at 12% initially and will come down to 11% by FY28. In contrast, the US and other European nations are levying a 50% tariff on China. The impact of the safeguard duty has been to arrest the decline in steel realisations that started in FY22 and continued into HIFY26.
But, if Chinese exports continue to rise, will the goods not seek cheaper tariff rate countries (like India) compared to more expensive ones (like the US)? Hence, are we not still in danger of seeing its impact, despite the temporary relief that the measure may have brought to stock prices?
Well, the top 4 companies have reported steel realisation growth of about 0.8% for the first time since 2022. But more is expected ahead because other input costs have turned benign and are likely to continue to remain so ahead. With continued decline of raw material prices and a marginal growth in realisations, the EBITDA margin for the sector increased to 15.7% and is reflected in the sharp rally of stocks in the last six months. So, now the companies are very reliant on realisations getting better owing to the safeguard duties. Especially in the light of the fact that all four major companies are in the midst of some large capacity expansion.
If one looks at the sales growth of the four leaders (Tata Steel, Jsw, Jindal and Sail), then JSW shows the best trends. Tata Steel numbers are slightly better on most parameters compared to the other three.
Let’s check what the charts are saying for these four stocks.
On a relative analysis against the Cnx Metal index, there is little to choose between Tata Steel, JSW and JSPL. But SAIL has been quite the laggard for quite some time, even into the present. This could be owing to the fact that debt levels of SAIL are its biggest concerns and the market may be wanting to see how that gets handled, going ahead.
This is reflected in the monthly charts as shown in Chart 2. We can note that it is the only stock that has not made a new high yet.
Interestingly, SAIL has retraced 78.6% of the fall while the other three have pushed to all time new highs. Can it continue higher or will it be the first to react?
Momentum signals of the four stocks are different. Tata Steel and Sail wear a similar picture, with Adx Powertrend signals intact, suggesting that there should be more uptrend for both. The other two appear to be a bit stretched in their trends already and are beginning to shed some upward momentum. Reversal signals are far away but it is possible that trends in the latter two may now lag the uptrends that are being seen in Tata Steel and Sail.
Derivative signals are sanguine in all but Sail. See chart 3 which shows the OI build up and changes through the last one month.
For some reason, Sail spent the better part of the last month staying in futures ban and this led to a steady erosion in its Open interest. Prior to that it had seen a strong positive build up in OI and this was ahead of the safeguard duties, so, obviously, someone knew about this news and took up a large position ahead of the news. As the prices rose, the positions appear to have been slowly unwound. In the new series, the positions have been rebuilt. But note the first day of long build (green) followed by a larger OI on the decline of last week (red).
With these two (Sail, Tata Steel), just about gathering strength, any slippage here will be bad news for the trends. The other two (Jsw and Jspl) may be getting ready to react as momentum is overstretched a bit.
It will be important to watch the Q3 results for these stocks. Any beat on expectations (which are not too high anyway) would continue the bullish trends in them. But if there were to be disappointments, then we may see all of them peel back a bit from their recent rallies.
Fundamentally, JSW Steel is looking the best but it is slightly stretched technically. On the charts, Tata Steel and Sail appear to have the edge over the other two in the near term. Hence these two are quite a bit dependent on how the Q3 results shape up. On the Derivative front, Sail is undergoing some unwinding and hence caution is to be exercised.
