India: HRC-rebar spread remains in negative zone in Q1FY'25. What lies ahead?

Morning Brief: The HRC-rebar spread has remained in negative zone for the entire first quarter (April-June, 2024). It eased a bit in June, 2024, from May's record low. But still, hot rolled coils (HRCs) continued to be sold cheaper compared to rebar with the spread at a negative INR 3,600/tonne ($43/t), reveals data maintained with BigMint. Usually, HRCs are sold at a premium of around INR 4,000/t ($48/t) to rebar.

In June, benchmark rebars fell 1.55%, to INR 57,400/t ($687/t) against INR 58,400/t ($699/t) in May. HRCs also dipped, but by a minuscule 0.55%, to INR 53,800/t ($644/t) compared to INR 54,100/t ($648/t) in May.

HRC prices rise slightly but buyers stay away: Although prices of both HRCs and rebar fell m-o-m, the former experienced only a shallower dip mainly on account of two bouts of price hikes in the first half of June. In early June, tier-1 mills raised list prices by INR 500-1,100/t ($6-13/t). On cue, trade-level HRCs saw a minuscule INR 100/t ($1/t) hike. However, for the rest of June, prices remained range-bound as buyers resisted these hikes.

Exports continued to remain a damp squib, with mills holding back offers for two months back-to-back.

Imports surge challenges flats: Cheaper imports are becoming a huge challenge for domestic tier-1 mills producing HRCs. In fact, India is set to become a net importer of steel in the first quarter (April-June, 2024). Import bookings have been consistently higher than exports in these three months. Cumulatively, in Q1FY'25 (considering provisional numbers for June), imports are expected to rise to 1.95 mnt compared to 1.51 mnt of exports. Resultantly, demand pressure mounted on mills to keep flats prices range-bound.

Dull post-poll demand, monsoons impact rebar: The expected upturn in demand, post-general elections, eluded the market. Buyers remained uncertain in the initial part of the month with the elections failing to throw up a definitive result. Even though enquiries trickled in, few translated into actual deals because, from mid-June, the monsoons made an inroad, slowing construction activities. Although some mills raised prices by INR 500-1,000/t ($6-12/t) in early June, there were few buyers. Prices were also impacted as end-users went into a wait-and-watch mode ahead of the Union Budget (expected in mid-July) and also due to the slide in IF rebar prices.

IF rebar under inventory pressure, offers discounts: Induction furnace rebar prices failed to offer support amid a dull demand scenario last month although mills raised prices slightly in early June - because the scorching summer diverted coal towards power generation. This raised prices of the fuel. Sellers offered discounts which effectively reduced prices but buying was weak as construction slowed. Inventories idling time piled up for 12-15 days from 6-8 days in April. As a result, prices hit a three-month low, making many think these had bottomed out which also led to a slight upturn in buying in the last week of June. Billet prices failed to support IFs, falling to three-month lows.

NHAI show-cause to IF mills on quality issues: A show-cause notice to 11 IF mills for their failure to comply with the requisite standards specified in the IS:1786 norms also impacted rebar prices. As per the show-cause, in case of inconsistency in the quality of materials/products, NHAI reserves the right to suspend the one-time source approval for the products supplied by the empanelled firms in case they fail to come up with a satisfactory explanation.

Rise in rebar supply impacts prices: Rebar supplies saw a rebound with the resumption in production at RINL. This PSU major's production had been hit by the month-long workers' strike at Gangavaram Port which led to pile-up in imported coal cargoes and clogging up of supplies of the same to RINL. This had resulted in over 30% drop in RINL's production.

However, with the strike resolving, coal cargo supplies to RINL also resumed, reviving its steel production yet again. But the rise in supply did not help prices in a lacklustre market.

Prices may move in a narrow range in July. IF rebars may have bottomed out and not fall from here. But, overall, market conditions will not be too supportive because of the monsoons. Flat steel prices may see a slight dip amid the imports pressure. However, all eyes are now on the EU quotas and this may spell some good news for mills.