Steel stocks fell on Tuesday after global brokerage Morgan Stanley in a report said that steel prices are likely to be hiked in the first week of June. Also, the potential easing of restrictions on steelmaking in Tangshan China weighed on the sentiment. One must note that Tangshan accounted for 13.7 percent of China’s total production last year.

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Even as benchmark Nifty was at record high levels, the metals index underperformed.

The Metal index fell nearly 2.5 percent in today's session with SAIL, JSPL, Tata Steel and JSW Steel down 3-5 percent.

Morgan Stanley noted that its channel checks indicate steel price hikes of Rs 3,250-10,000 per tonne across flat steel and coated products in India in the coming week. It sees tailwinds to first quarter realizations/profitability with upside risks.

"Post this price hike, domestic HRC prices prevailing in the market would be at a 5 percent discount to import parity prices (landed cost of imports from China). We believe even if these prices are sustained, there will be room for positive earnings revisions over the coming quarters," it added.

It added that it continued to prefer Tata Steel and JSW Steel in the steel space.

For JSW Steel, domestic demand and company volume growth improving ahead of expectations, leading to higher steel prices is the key upside. Also, faster project ramp-up and faster-than-expected production from auctioned mines will help the steel firm.

Meanwhile, weaker-than-expected prices/volume momentum and higher-than-expected iron ore cost from auctioned mines may provide some downside.

For Tata Steel, key upsides include improvement in Indian steel demand growth and recovery in steel prices and improvement in European business profitability, aided by better pricing and/or potential divestment/JV partner for the business.

While correction in international steel prices, steeper losses in Europe and surge in COVID cases are key risks.