India: HRC-CRC spread at 6-month high on escalated cost

• Higher CRC prices widen gap with HRCs
  
  
• High coal, gas prices raise CRC's conversion cost
  
  
• Automotive steel demand improves, supports CRC price spurt
  
  

Morning Brief: The hot rolled coil-cold rolled coil (HRC-CRC) spread expanded to INR 7,500/t in March, 2022, the highest since INR 8,380/t seen in September, 2021. Average monthly trade-level HRC prices have risen m-o-m by INR 7,200/t but, CRC even higher, by over INR 10,000/t. Since January, average HRC prices are up 15% and CRC by 21%.

Factors influencing CRC's upward climb

• CRC conversion cost: Both HRC and CRC prices are primarily cost-driven at present. However, a cost of conversion is incurred on CRCs, which has increased by a significant INR 2,000-3,000/t especially since the last three weeks, because of the increase in power and gas costs. "The conversion cost is governed by several factors but overall mills are seeing an upward impact of INR 2,000-3,000/t, which has particularly pushed up CRC prices," informed a primary mill source.
  
  

Power costs have risen due to the huge increase in thermal coal and gas prices.

"The cost impact on value-added downstream products is over and above the cost impact on hot rolled," the source informed. As a result, coated products are being further impacted by an additional INR 3,500-4,000/t over the CRC conversion cost, because of spurting zinc and aluminium prices. The cost escalation in coated is around INR 6,000/t.

• Supply scarce: CRC supply was scarce in March as mills liquidated substantial inventory overseas, traders observed. Average CRC FOB prices in March, east coast of India, commanded around $1,283/t against $1,052/t levels for average domestic prices in dollar parity. February, 2022 prices were at $983.75. Thus, March saw export offers up by over 30% m-o-m.
  
  
• Demand for automotive steel high: CRC demand is high at present, said a downstream source, driven mainly by automotive as the semi-conductor supply scenario has improved. Auto production has been ramped up from 40% in September, 2021 to around 95% in February-March, 2022. "It is matter of demand-supply dynamics," said the source, but added that going forward, there is no visibility yet in the supply chain globally for the next few months.
  
  

Why will price momentum sustain?

Both JSW Steel and AM/NS India hiked their HRC-CRC prices as recently as 4 April, 2022. JSW Steel prices are up by INR 4,000/t ($53/t) and AM/NS India by up to INR 9,000/t ($119/t).

• Export bookings keep mills comfortable: Mills can afford to keep prices high as they are comfortably placed with exports bookings till April. "May be, prices will not see a steep hike from here on. But they will not drop either," said a market source. That apart, auto contract negotiations are still on and mills would not want the contractual prices, which are influenced by spot, to get weakened.
  
  
• Rising logistics costs: Another reason is crude oil. Benchmark Brent has been trading upwards of $100/barrel - the highest since 2008 - since the onset of the Russia-Ukraine war. Brent has climbed 27% from pre-war levels of $96.84/barrel on 22 February, 2022 to $123.21/barrel on 7 March, 2022 but dropped to $112.48/barrel on 28 March, 2022, dragging up logistic costs by INR 8-9/t in the last fortnight alone, a primary mill official said. "Diesel inflation will have an automatic impact on road freight since prices are computed on delivered basis," the official added.
  
  

Outlook

The steel price rally from the mills end will likely last for at least two months. The reasons are two-fold. One is that the cost pressure will continue till end-May-early June because of high input costs. Then, mills will have to see how commodity prices behave, because downstream buying is also becoming a challenge. The cost impact on steel production between March to May will be around INR 20,000-22,000/t, as per a mill source.

Secondly, demand is traditionally high in April-June, till the monsoon sets in, which will also support the high prices.