India: HRC, rebar price spread touches 2-year highs

Hot-rolled coils (HRC) and rebar price differences, which had been following a more or less narrow range from December 2018 until February 2020, now seem to throw up a rather divergent trend. The gap has widened to a record two-year high of around INR 4,000 in the first week of October 2020 with HRC prices, ex-Mumbai, shooting up to INR 42,000-43,500 per tonne (MT) against BF-grade rebars' more moderate reigning prices of INR 38,900 - 39,500/MT.

The spread has been widening since the first week of September 2020 at INR 3,050, when HRC prices, ex-Delhi, shot up to INR 42,250 per tonne against rebars' more sedate INR 39,200 per tonne.

Prior to September 2020, such a wide price differential between both categories was last seen in August 2018 (data tracked since January 2018), when HRC prices had stayed elevated at INR 45,200-45,500/MT against INR 42,000-43,500/MT for rebars, the price gap touching a then-record INR 3,250/MT in the second week of August 2018. But that happened two years ago and had been a function of demand and supply. In fact, HRC prices had historically hit even higher at INR 46,000-46,500/MT, in April-May 2018. However, prices of rebars had risen in tandem to INR 45,500/MT, thereby narrowing the price gap between both.

After hitting this historically wide differential in the second week of August 2018, the spread since then had narrowed with prices of either item sometimes overtaking the other, depending on market conditions, until August 2020. In fact, HRC prices have steadily risen since then till October, with all integrated mills announcing a steep hike of INR 1,000-2,500/MT for October deliveries. Mills announced a hike in HRC and CRC prices twice in September 2020 with SAIL increasing the rates thrice in this very month.

Rebar prices, however, after hitting a high of INR 41,100/MT in May 2020, fuelled by the exports wave at that time, have climbed down a few notches but have remained range-bound at INR 35,000-39,500/MT since end-May till now.

Why are HRC prices rising?

We may not need to look too far beyond. Many of the flat or HRC guzzling sectors, like automobile and consumer goods, have rebounded since the lockdown was eased from June.

Automobiles- Sales have increased with September 2020 logging the best numbers so far in the last one year. As per team-bhp.com, against the backdrop of the upcoming festive season and anticipating demand rebound, dealers have stocked up on inventory.

As per data on this website, vehicle sales from top 15 manufacturers accelerated 33% year-on-year in September 2020 to 292,883 units against 219,673 units in the same month in 2019. Individually, many manufacturers improved sales sharply. Passenger car market leader Maruti Suzuki's September 2020 sales swung up 34% year-on-year against the same month in 2019, while Tata Motors and Kia Motors sales in the month under review catapulted 174% and 141% respectively y-o-y.

The growth in passenger and two-wheeler sales is a fallout of the pandemic. Consumers are wary of using public transport to commute to and from work and are thus rushing to buy vehicles. Secondly, there was a pent-up demand in the market especially from the tier 1 and 2 towns, along with the upcoming festive season which traditionally sees high sales, fuelled by new launches.

White goods- The consumer durables sector saw a better-than-expected demand recovery in the second quarter (Q2) after easing of the lockdown. As per a report by Emkay Global, there was a continued demand for white goods even after the initial pent-up demand in June. Sales of washing machines and refrigerators saw better traction in August and September 2020 while there was moderation in residential AC (RAC) sales due to seasonality. But there were improved sales during Onam and August 15. The study also indicates there was a strong double-digit demand in fans, wires and small appliances. Fans sales could be a COVID-19 fallout since health experts have warned the virus may spread through air-conditioning although nothing concrete has been proved yet.

Supply shortage- Higher global HRC prices and frequent lockdowns in overseas markets have resulted in the absence of imports of the material, driving up domestic HRC prices. Moreover, domestic supply in flat products is also inadequate at this juncture with many mills temporarily shut. For instance, the CRCA mill within the JSW Vijayanagar plant will be operational from November or December. Meanwhile, SAIL's CRCA mill at its Bokaro plant is under maintenance. Meanwhile, Tata BSL is yet to resume its operations completely. Also, SteelMint learned from market sources that a "southern India-based plant has reduced its capacity utilisation by 30% due to COVID-19 concerns which may further restrict supplies by 20-25% in October compared to September.

Speaking on flats, an industry source said, "Flat steel products prices (long steel too, but more so for flats), are linked to the global flats market and echo global trends. Specific to domestic yes, there is demand, whether it is pent-up or not, we don't know yet. But some recovery in demand has happened, though a little late, for flat steel. It began from August-September. So that is playing the rally at the moment."

An industry veteran told SteelMint, "Yes, auto and various other sectors are up. These user industries did not buy any input material during the lockdown. So whether the rally in HRC prices will sustain from hereon we will have to see."

Long products prices stable

On the other hand, long products prices have not risen but at least remained stable this calendar, after losing ground since July-August 2019.

Reminding why rebar prices have sustained, an industry source said, first, the product that went into a sales overdrive was longs, basis exports, during and after the lockdown. Secondly, rural construction demand spurted after easing of the lockdown. Both factors helped in the recovery of long products more than flats from May till June. Secondary longs producers who had not been able to fully operate because of labour shortage and COVID-19 issues, ramped up their production, post-lockdown, which fed the rural market for some time.

Another source said, "I would not say longs prices are showing a downtrend. They are stable." Explaining why prices have maintained their stability, he added- "Now, major domestic markets have opened up while exports are down. A lot of supply-side issues have been corrected too - the secondary players are producing more than what they were earlier. These factors are keeping prices stable."

Infra- A worry?

However, one worrying factor for longs is that infrastructure so far has not taken off as expected. Of the 1,000-odd projects listed under the National Infrastructure Pipeline (PIP), accounting for over 80% of its total value, less than a fifth were not even tendered for. In fact, as per a media report, there are several discrepancies found in the NIP's listing of projects, with some having been listed more than once. As per industry sources, new infrastructure project announcements have halved over April-June 2020 to 1,241 against 2,500 in the same period last fiscal, and that government spending on infrastructure has fallen 40%. Sectors that reported a major y-o-y decline in project tenders include roads (down 60%), power distribution (down 52%), water supply and irrigation (down 45-50%), and railways (down 31%) as per the media report.

"Where longs are concerned, infrastructure has not picked up, especially large projects. Two products required in infra are not doing too well at present and these are longs and heavy plates (in flat steel)," an industry source said.

The source observed that government spend in the infrastructure is down because much of the funds have gone into MNREGA and other rural spends, which are boosting rural demand. Infrastructure has not been focused upon the way it was being done previously. "But, for the government to sustain even rural income and overall purchasing power, spends have to be made on infrastructure only, whose impact is more long-term - the government can create jobs which in turn can improve purchasing power. MNREGA and other schemes have more short-term impact," the source reasoned, but sounded slightly upbeat- "Some green shoots in infra are visible from September-October."

Footnote

Is there a prospect of long product prices rising over the rest of the fiscal?

Mills feel they should, basis rising domestic demand but some sources are wary whether this demand will sustain.

"There is a surge in the auto sector and we also see improvements in the selling of rounds. The construction sector and different project activities are picking up. Hence, there is a positive outlook for rebars/longs in the coming quarters," RINL Chairman P.K. Rath told SteelMint.

HRC production was low in April and first half of May. But from the second half of May, all mills started producing. AM/NS India resumed 100% production from the second half of May.

Actually, post-lockdown, mills were not very clear as to what the demand recovery would be like in the domestic market. Hence, they resorted to exports to keep the revenues coming in. The forecast was that 40%-50% domestic demand would come back into the market, and the balance would comprise export sales. However, mills now see that the domestic demand recovery has been somewhat better than their expectations. Month-on-month, the demand destruction in April had been close to 75-80% if not more. But demand recovery in May was close to 40% and in June, 50-65%. July-August-September each saw an 80-85% recovery or rebound to pre-COVID-19 levels. Some sectors have seen better than pre-COVID-19 levels - for instance, automotive, tractors and certain coated steels that go into rural roofing.

An industry insider expects 90-100% demand recovery in the current quarter, "And that should boost long product prices. I don't think there is any risk of HRC prices losing steam for the rest of Q3 either," he said.

~By Madhumita Mookerji