Intelligent investing is all about finding value in scrap

Steel

In plain English, scrap as a noun means junk or something that’s totally worthless. Since ‘go green’ is a buzzword nowadays, it would be unintelligent to describe scrap as waste. As we experience a transition from a linear economy to a circular economy, scrap for one can always be a resource for another.

At a time when two powerful Asian economies India and China are battling to deal with power shortages, rationalizing the utilization of energy by energy-guzzling industries such as iron and steel has become a top priority for governments, policymakers and steel manufacturing companies.

India is the second largest steel producer with a crude steel volume of 102.5 million tonnes in FY21. Despite this, India depends on steel imports. The country meets 15% of its annual demand for speciality steel through imports. Out of India’s total steel imports of 6.7 million tonnes, nearly 60% can be attributed to the imports of speciality steel.

Speciality steel includes the steel grades used in coated/plated steel products, speciality rails, high-strength-wear resistant steel products, electrical steel, wires and alloy steel products amongst others.

As you may be aware, India’s National Steel Policy envisages production of 300 million tonne by 2030. Taking such a quantum leap isn’t possible without reforms in steelmaking.

Changing face of India’s steel sector: from inefficient to globally competitive

According to the Ministry of Steel, Indian integrated steel plants consume approximately 30% more energy as compared those operating abroad. The use of obsolete technology and instances of poor quality of raw materials are the primary reasons for high energy consumption by Indian steelmakers. That said, the situation is gradually changing now, for the better, with more companies embracing sophisticated technologies in steel manufacturing.

A tonne of scrap used in steel manufacturing avoids the consumption of:

  • 4 tonnes of iron ore
  • 740 Kgs of coal
  • 120 kg of limestone
  • And preempts the emission of 1.5 tonnes of carbon dioxide

In a circular economy, using steel scrap in steel manufacturing is crucial.

It might surprise you but India has been one of the largest importers of the ferrous metal scrap.

Primary and secondary steelmakers in India are likely to consume 75 million tonnes of ferrous scrap p.a. by 2030—a 134% jump from 32 million tonnes p.a. they consumed in 2019. However, at present India relies on imports for meeting ~22% of its scrap demand.

The United Arab Emirate (UAE), the US and the UK have been India’s largest scrap suppliers in this order.

Moreover, the quality of scrap available domestically can be called into question, especially due to the absence of any formal scrappage policy until recently.

But the situation seems to be changing for the better.

India has been implementing reforms in an integrated manner.

For instance, the Indian government launched a Production-Linked Incentive (PLI) scheme in July 2021 for promoting speciality steel manufacturing in India with a projected outlay of Rs 6,322 crore.

Besides this, the government also launched the National Vehicle Scrappage Policy. The primary objective is to reduce India’s import reliance.

The PLI scheme is expected to boost India’s speciality steel capacity by an additional 25 million tonnes.

On October 12, 2021, our research team released a stock report on a company that’s ramping up its speciality steel production capacity by 40%. The said company uses ferrous scrap as a key raw material to produce high-strength specialized steel. Our research team believes a combination of the National Vehicle Scrappage Policy and PLI for specialty steel should brighten the prospects of the company covered in the report.

In future, steelmakers may find it easy to procure ferrous scrap domestically and it could be economical too.

The popularity of EVs in the stock market is going through the roof even before EVs are prevalent on Indian roads. But identifying companies to take advantage of the potential EV revolution, might be a struggle since there are no pure-plays in India at present. The most obvious choices could revolve around battery manufacturers or component suppliers to automakers.

Don’t ignore steel and ferro-alloy manufacturers in this context.

Wondering what’s the connection between Electric Vehicles and Steel?

As far as EVs are concerned, the selection of materials that go into automobile manufacturing, chiefly decides the total emissions at various life cycle phases of a vehicle. Research till date reveals that using Advanced High-Strength Steels (AHSS) instead of aluminium in vehicle light-weighting helps reduce emissions of Green House Gases (GHG).

Moreover, strength, complete recyclability and relatively low energy intensity in steelmaking are additional positives.

Our research team recently wrote an extensive and exhaustive report on Vardhman Specialty Steel Ltd. According to which,  Vardhman Specialty Steel Ltd could be a good bet to play the EV theme.

Are you wondering why?

Aichi Steel Corp, a subsidiary of Toyota, holds a 11.4% stake in Vardhman Specialty Steel Ltd and provides it with technological assistance as well. With the help of Japanese technology, the company is expected to reduce wastage in manufacturing, generate better yields, rollout high-quality products and increase its export revenue.

Interestingly, the stock has a potential to give 110% returns over the recommended price of Rs 237, over the next 24 months.

Click here to read the entire report.

PS:  And after reading about steel, if you are still thinking about scrap, don’t forget to watch this  video which we published on September 19, 2021. The second stock mentioned therein might be a company that you want to read more about.

You may also like to read: 2 most important factors that stock market investors should track now

 

Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities.

Please note, Ventura Securities Research division recently initiated the coverage on Vardhman Specialty Steel Ltd. If you are planning to take any investment decision based on the said coverage of Ventura Securities, we strongly recommend you to read risk factors/disclosures/disclaimers mentioned therein.

The same holds true for stock recommendations made on other properties of Ventura Securities.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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