India: HRC-CRC spread at over 2-year low on dull demand

• Omicron spread creating further lack of demand
  
  
• Chip shortage leading to lesser CRC consumption
  
  
• Mills resort to sales at prices lower than listed
  
  
• Europe may resume buying
  
  

The hot-rolled coil (HRC) and cold-rolled coil (CRC) spread has dropped to a two-and-a-half year low of around INR 4,800/tonne ($65/t). The last time it hovered around this range was in Aug'19, at INR 4,875/t, reveals data maintained with SteelMint. The current spread is more than 70% down compared to the peak of INR 16,250/t ($218/t) seen in Jun'21.

Prices of both HRCs and CRCs started dropping from Nov'21. HRC prices, for instance, from a level of INR 71,000/t ($953/t) dropped by INR 5,500/t ($74/t) m-o-m to INR 65,000/t ($874/t) in Dec'21 while CRC prices too eroded m-o-m by INR 5,700/t ($77/t) to INR 70,200/t ($944/t).

Why has the spread narrowed?

Lack of demand driving down prices: The overriding sentiment is rather negative. The recent drop and then roll-over of list prices suggest that the market is not supporting the price levels at which it started out in early Dec'21. The onset of the third wave of the pandemic has slackened demand further. Hence, list prices saw a reduction by up to INR 3,000/t for Jan'22 deliveries. With demand down, trade prices have also been much lower than list prices. The Omicron variant is spreading at a lightning speed, which has unnerved market participants. Traders are not keen to invest funds in stocking up on fresh inventory.

Mills clear stocks at discounted prices: Industry sources indicated that few of the major mills in India cleared some of their stocks through auctions and non-confirmed orders (NCOs) at rates that were nearly INR 10,000/t lesser than the list prices. A leading western India-based mill, for instance, sold "secondary" grade CRCs, but which were almost of "prime" quality, at ex-plant prices of INR 58,000/t ($780/t) in a recent auction.

Another high profile global steelmaker with a marketing presence in India, last month, sold prime quality flat products, mainly non-standard width coils, as NCOs. The materials were sold across grades in volumes of 200 tonnes each, in the Maharashtra region. Prices ranged from INR 60,000-66,500/t - much lesser than the list prices of around INR 75,000/t.

"The above two factors played a very negative role in November and December last year, with respect to especially CRC coils and sheet prices," said a source.

Chip shortage impacting CRC demand: The chip shortage is a global phenomenon and impacting auto production. CRC is used in large tonnages in automotive applications. As a result, demand for the same from the auto segment is down.

Maruti Suzuki India, the country's largest car manufacturer, on 3 Jan'22, reported a 2% y-o-y drop in production volume for Dec'21. Production of passenger and commercial vehicles combined last month stood at 152,029 units. In comparison, the carmaker had produced 155,127 vehicles in Dec'20.

The Covid surge is negatively impacting automotive demand.

Outlook
The HRC-CRC spread may start widening from Feb-Mar'22, based on the information available from the automakers. A source at a leading mill said the auto segment may see an improvement in chip supply which should boost their production. This, in turn, can turn around the demand for CRCs.

Trade sources informed that the export pressure on mills may ease because Europe is making noises about a return to buying. This should keep export prices above the current cut-off of $750/t CFR they are looking at.

However, the short term looks dull because of the global Omicron surge which will impact demand negatively.