India: HRC-rebar prices converge in Nov. Are flats more under pressure?

• Average prices in Nov at INR 56,000/t for both
  
  
• Muted exports, cheaper coking coal weigh on HRCs
  
  
• Rebar stays supported by infra demand, high energy costs
  
  
• China's expected demand rebound may pep up markets
  
  

Morning Brief: The HRC-rebar spread touched nil in November, 2022, hitting a two-year low. The second-lowest record was of INR 100/tonne (t), seen in December 2020.
The spread had been moving in a precariously narrow range of INR 300-400/t since August before finally converging last month, when average prices of both ruled at INR 56,000/t ($690/t).

Reasons for price convergence

1. Muted exports markets impact domestic HRC prices: Exports continued to remain subdued in November. The 15% export duty was removed from 19 November. However, the much-expected rollback did not have the desired impact on overseas sales. Global demand is lukewarm and Europe did not show any pre-winter restocking tendency. India's other export markets like Vietnam and others have become flats exporters themselves. Out of India's 20-million tonnes of exports in CY2022, the share of flats was over 60%. Within flats, HRCs enjoyed an overwhelming 51%. Therefore, with India's steel exports having plunged over the last many months, mills are under pricing pressure domestically in flats as well.

Now with most primary mills operating at optimal capacity post-return from maintenance shutdowns in August-September, production volumes are weighing on them. "There is inventory pressure on mills, giving little scope to raise HRC prices," confided a source.

2. Cheaper imports weigh on HRCs: Even if most mills have refrained from looking at imports as a threat, the ground reality is slightly different. Some user-segments are booking imported HRCs, albeit in small volumes. SteelMint understands that the landed cost of imports from Japan, computed end-November, works out to about INR 48,000/t levels ($588/t CIF, 1 USD = 81.3844 INR) against INR 56,000/t for domestic material, a difference of more than INR 5,000/t. Earlier, some Japanese HRCs had been booked, followed by small lots from Vietnam. Pipe manufacturers are showing a propensity for imported HRCs, SteelMint overheard. "Even if the imported material takes time to arrive in India, there is uncertainty whether domestic prices will drop by INR 5,000/t within two months. Unless domestic prices fall to INR 50,000/t levels, imports will remain more viable," confided an end-user source.

3. Longs supported by high energy prices: Globally, the spread between flats and longs has narrowed and India is no exception. In most countries across the globe, long steel is manufactured through the power-intensive electric arc furnace (EAF) or induction furnace (IF) routes. With energy prices having touched record highs over the last one year or so, aggravated by post-Covid recovery and then the Russia-Ukraine war, the cost of producing longs has escalated. Therefore, mills have no option but to keep rebar prices on the higher side to recover the cost of production. For Indian mills, imported South African RB2 prices have risen from an average of INR 14,500/t in January-February, 2022 to almost INR 19,000/t over March-November, 2022. Domestic thermal coal prices have moderated, but preference is given to the power sector.

On the other hand, the cost of coking coal has fallen from the peak of over $600/t to $300/t levels, another factor putting pressure on tier-1 mills' flats prices.

4. Project segment keeps rebar supported: The project segment is buying in good volumes with rebar prices hovering in the INR 56,000/t range. Moreover, demand is expected to be good as projects near deadlines in step with the financial year's closure. Project closures underscore escalated rebar and other construction steel procurements. That apart, 2024 being an election year, the government is expected to push for more infrastructure projects in its run-up. These factors are keeping rebar supported.

What may happen?
All eyes are now on China, which has been silent for a few months amid its Covid surge, real estate market crisis and production cuts. Measures to inject liquidity into the realty sector are expected to nudge up investments in the same. This, in turn, is feeding expectations that Chinese demand may resume post-Lunar New Year festival, starting 22 January, 2023.

Closer home, looking at the very near term, the buzz is that Indian mill-level HRC prices could see a fresh round of cuts of INR 1,000-1,500/t whereas rebar rates could be rolled over.