Hindalco, Tata Steel, JSW Steel share prices: Reflation and the revaluation of emerging market (EM) currencies (versus the US dollar) have been driving commodity prices higher, along with a demand uptick in China. CLSA expects domestic steel prices to remain resilient in the near term as the domestic demand uptick adds to the above themes. However, CLSA expects prices to cool off and spreads to moderate over the course of 2021. The demand outlook in China following Chinese New Year will be a key item to monitor. CLSA forecasts FY22 spreads to be higher YoY but to be lower than spot. In a rising commodity price environment CLSA prefers Tata Steel (BUY) on its better margin outlook.

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CLSA maintains BUY rating on Hindalco given its resilient earnings outlook. In this note, CLSA also conducts a mark-to-market (MTM) analysis, which implies much higher upside.

China: near-term outlook strong but all eyes on post-CNY resilience:

Reflation, higher liquidity and the revaluation of EM currencies are likely to drive near-term commodity prices. After a positive surprise in 2020, China steel demand is likely to rise further (mid-low single digit) in 2021, driven by stimulus and an increase in credit by the government. Steel utilisation is likely to remain at 90% through 2021, supporting prices and spreads, both in China and elsewhere in the region. The sustainability of a global growth rebound and the demand outlook in China after Chinese New Year are the key points to watch in the sector.

Domestic demand improving but prices are sticky:

India steel consumption registered its first positive reading in Nov in 11 months. As activity stabilises, we expect demand growth of 13%-14% YoY in FY22 (flat 2-year CAGR). Steel mills have been able to liquidate inventory over the past few months which augurs well for utilisation rates. Driven by higher regional prices and supported by a domestic demand pick-up we expect Indian steel prices to remain resilient at least till 1Q21 and likely to soften in 2H21. CLSA expects FY22 average prices to be up 4% YoY, but to decline from spot. Lower domestic production (mainly in Odisha) and higher exports, along with higher global prices have supported iron ore prices in India. Overall, CLSA expects spreads for nonintegrated players to rise YoY in FY22, but to likely be below spot. Hence, CLSA thinks integrated mills are better placed in the current cycle.

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MTM analysis implies much higher upside, but is unlikely to be sustained:

MTM analysis implies 14%-31% higher EBITDA across these four companies and 27%-49% higher implied values. The highest increase is for JSW Steel. CLSA do not expect current prices and spreads to continue as reflation and dollar devaluation reverse in the second half of 21.