India’s steel demand has likely been flat/down YTD. Steel prices fell below the anti-dumping floor briefly in Oct19.

Expecting global steel prices to rise on greater likelihood of China easing and potential demand upside in ROW and India, we upgrade TSL (Top Pick) and JSTL to Buys (from Sells) and SAIL to Neutral. Further volatility in margins should ease as China’s supply additions would end in 2020e, and we don’t expect a sharp deceleration in China demand at least until the mid-decade.

We thus raise our target EV/Ebitda for TSL and JSTL to 6.5x EV/Ebitda (from 6x), set at historical means and applied to the historical 10-year consensus estimates (two mini cycles). We raise our target P/B for SAIL from 0.3x to 0.5x on an improved outlook. FY21e Ebitda is raised 6-18% on higher spreads.

Favourable China/global policies likely

China steel demand has run ahead of expectations in 2019, whereas the Rest of the World disappointed (-2% YTD). Margins hit a low (since FY16) in Q2FY20, but have rebounded ever since on low China inventories and ex-China curtailments. While China’s future demand remains a wildcard (resilient near term), the Central Economic Work Conference (CEWC) and the PBoC’s recent 5bp cut of the 7-day RRR raise the probability of govt easing. With 2020 an election year in the US, expect positive policies for global trade/growth.

China’s property starts could slow

Citi’s China property team expects property starts to decline in 2020, off a high base, as unsold inventories increase. Our economists believe a nationwide outright easing of the housing curbs policy is still unlikely, but statements at the CEWC open the door for more visible city-specific loosening. Property sales shouldn’t thus fall off a cliff.

India’s FY21 demand should rebound

India’s steel demand has likely been flat/down YTD. Steel prices fell below the anti-dumping floor briefly in Oct19. After a trough of `34,500/t (and the end of the destocking cycle), domestic prices have been hiked by ~4% through Nov/Dec (now at import parity). The import parity price has also increased. We think India’s demand will rebound from the trough and thus we incorporate further upside to steel prices. Our average HRC price expectation for FY21 is flat vs. FY20 at Rs 38,000/t (spot Rs 36,000/t).