Indian HRC prices increase. But, what factors should mills watch out for?

Domestic HRC prices spurt on restocking rush

Hot rolled coil (HRC) prices have spurted sharply in the last fortnight. Distributor-level ex-Mumbai prices climbed up from INR 65,300/t ($868/t) in end-Sept'21 to INR 67,800/t ($901/t) in the first week of October and then further to INR 70,900/t ($942/t), narrowing the gap with cold rolled coils (CRCs) by INR 5,000/t ($66/t). Mill-level prices were hiked INR 1,500/t ($20/t) on average across flats in October.

However, it should be noted, with good margins maintained in CRCs, these prices have remained range-bound since September.

The key interlinked reasons for the swift rise in HRC prices are three-fold:

• Restocking activities are on in full swing;
  
  
• Traders are expecting mills to hike flats prices again towards end October, which is goading them to stock up even further; and
  
  
• Traders further fear the coal and power crises may compel mills to raise prices again to offset the rising production cost.
  
  

"Traders are rushing to stock up before end-October to avoid a price level that would hurt their bottomline. This is the peak demand season and traders are optimistic of an increase in demand for white goods and autos, which will boost flat steel demand. They want to avoid a scenario where demand would be high but they would be unable to supply," says an industry insider.

SteelMint understands that mills will increase prices in October. However, there are two areas to watch out for:

• Mills are not under pressure because of the recent domestic rush to book materials at previous lower price levels. On the other hand, they have to book their November shipments to meet their export allocation targets, especially in flats, which comprise significant quantities per month. August volumes almost touched 0.80 million tonnes (mn t) although September saw these dropping to 0.52 mn t.
  
  

However, HRC export prices are not that attractive at present. Latest SteelMint India HRC index prices are at $873/t against Chinese offers of $$975-995/t, but competing Russian offers are low at $870-880/t and CIS, even lower at $800-820/t. Indian offers in the domestic market are fetching a higher net sales realisation of $942/t levels (INR 70,900/t with dollar at 75.26 ) compared to export prices.

The question thus arises as to whether it would be more prudent to increase domestic sales rather than meet resistance to the persistent price hikes?

But many say mills would prefer to wait and watch because of less domestic pressure.

• Secondly, despite the rising input costs for mills, the looming power crisis in India can impact the production schedules of downstream industries- especially auto, consumer durables and engineering goods - which can lower steel consumption. The possible power outages can slow down industrial activity in November-December, although August IIP data shows a growth of 11.9% while the manufacturing sector grew 9.7%.
  
  

Outlook

However, even if industrial activity slows down, curtailing production is not an option before the blast furnace mills. Thus, chances of HRC prices falling from current levels are slim, even if they do not rise further.

On the other hand, longs prices will see sharper upward trend because of the coal and power crisis and possible production drop, which will narrow down the around INR 10,000-12,000/t (($133-159/t) gap with HRCs.

"In China, rebar prices have headed north, narrowing the gap with HRCs. That trend may get replicated in India," says a source.

Going forward, China's severe coal and power crisis will further cap crude steel production and lead to lower export allocations, which will obviously benefit Indian exporters.