Europe to be key factor in January for Indian mills. Know why?

How will the first month of the brand-new year unfold for the Indian steel market? The Omicron scare, chip shortage, lower import demand from China and a satiated Europe are issues that will follow into the short term.

The only green shoot for Indian mills is in the form of the record rise in gas prices in Europe. As per a recent report, forward prices in Europe doubled over the past month. Summer prices exceeded euro 100/megawatt hour ($113/mwh). This rally is expected to sustain for the long term, as per sources. As a result, many mills in Europe are staring at production cutbacks or temporary shut-downs.

As with India, which encountered a shortage in power supply on the back of post-lockdown demand, similarly, as economies rebounded after lockdowns in Europe, supply of natural gas fell short of surging demand. In recent history, as developed economies became environmentally conscious, they started lowering their dependence on coal. On the other hand, gas production has shrunk from 300 billion cubic metres in 2005 to less than 200 bcm in 2021, with Russia left as the main supplier and Europe open to geo-political pressures.

It is too early to estimate the rise in cost of steel production in Europe or the impending impact on India - because of the rising gas prices. As per a report, steel mills and other energy-guzzling industries in Europe are already asking governments to intervene to stall the record surge in gas and electricity prices

But, this should be good news for Indian mills. Sporadic deals to Europe have begun taking place. The probable impact of the rising gas prices may dovetail with the quotas opening up from Europe for Q1CY'22.

Production: India's January crude steel production is expected to be higher than the 9.6 million tonnes (mn t) seen in Nov'21, which was actually a 2% m-o-m drop. The levels in January will be higher, propelled by JSW Steel's commissioning of the 5 mntpa second phase of its Dolvi plant. The company reported a 10% y-o-y growth in its crude steel production in Nov'21 but this excluded the Dolvi output which will be factored in from the new calendar.

Demand: The Jan-Mar quarter is traditionally a good one for Indian mills because of the heightened demand from the infrastructure sector. Government projects often move toward closure as the financial year ends. Demand for construction steel thus escalates in this quarter. Total consumption demand should be higher than the 8.47 mn t seen in Nov'21, as per JPC's provisional figures.

India's finished steel consumption dropped 8% in Nov'21 y-o-y and 3.2% m-o-m. There will be potential flat steel demand going ahead but the semi-conductor issue continues to trouble automakers, sources inform.

Prices: The price scenario is hinging on which way natural gas moves in Europe. If the high prices sustain then Indian exports may pick up. At present, export realisations are much lower than domestic. For instance, current export realisations of around $725-730/t FOB translate into INR 54,000-55,000/t levels. On the other hand, domestic net sales realisations (NSR) of mills are ranging from INR 61,000-62,000/t. Thus, scales are currently tipped in favour of domestic sales by around INR 7,000/t ($93/t).

Therefore, there is scope of a downward correction in domestic prices, especially in flats although this is limited in longs because domestic infra construction demand is expected to be good.

Exports: India is unlikely to export in considerable volumes to destinations other than Europe in the short term, except for, may be, Vietnam (through which a lot of HRCs get re-routed to Europe after value-addition). But, again, the Europe factor will come into play. However, the Continent usually returns to the market from the second week of January, post-the Christmas and New Year holidays. If Europe buys then considerable indirect exports push will come from other destinations.

Margins: Profit margins will likely be under pressure in January because of the declining trend in export prices and subdued demand so far. Domestic benchmark HRC prices recently slumped to a six-month low to INR 63,500-64,500/t ($848-862/t). Export offers were anywhere between $770-790/t CFR last week and have fallen even lower to $760/t CFR levels at present - well below the $900/t CFR mark seen around July and definitely a plunge from the above $1,050/t CFR seen in May.