India: HRC-rebar spread widens further in Aug; Q3 factors to watch out for

• Maintenance, good auto demand keep HRCs supported
  
  
• Rebar impacted by global macro factors
  
  
• Pick-up in exports, auto demand expected in Q3
  
  

Morning Brief: The hot rolled coil (HRC)-rebar spread widened by another INR 800/t ($10/t) to INR 5,200/tonne (t) ($62/t) in August 2023. It is the highest level seen so far this calendar.

HRCs are usually sold at a premium to rebars. However, the spread had reversed towards the beginning of the year with rebars selling at a premium. Now, the trend is seen normalizing with the spread settling at current levels. In August, however, the spread widened further essentially because HRCs rose slightly m-o-m.

Thus, benchmark HRC prices touched INR 56,300/t ($677/t) in August against INR 55,500/t ($667/t) in July. But rebars remained flat m-o-m at INR 51,100/t ($614/t).

Factors that widened the spread m-o-m

Maintenance downtime allows mills to raise flats prices: India's tier-1 mills raised August list prices of hot rolled (HR) and cold rolled (CR) coil prices after a three-month gap. The subdued monsoon period allowed tier-1 mills to opt for maintenance downtime, which sucked out around 200,000 tonnes of material from the system. This created a shortage and allowed mills the leeway to raise HRC-CRC prices by INR 750-1,000/tonne ($9-12/t).

Good auto demand allows higher domestic HRC consumption: August saw good automotive demand in India which led to a re-organisation of domestic allocations. Mills were impelled to divert higher volumes of HRCs towards manufacturing of CRCs. Federation of Automobile Dealers Association (FADA) data reveals, the automotive retail sector in August registered a robust y-o-y growth of 9%. The uptick was consistent across vehicle categories, with two-wheelers seeing a 6% increase. Passenger vehicles were up 6.5%, tractors rose 14%, and commercial vehicles, by 3%. M-o-m, the industry saw a 3% growth in total auto retail sales, although tractors experienced a substantial 19% contraction.

As a result, bulk HRC and plate export shipments from India for August fell to 305,374 tonnes (provisional) against July's 339,155 t.

Coking coal prices up: Another key reason for the hike in HRC prices lay in the m-o-m increase in coking coal prices. The premium HCC, imported from Australia, rose 9% in August to $268/t FOB compared to the July average of $245/t. Moreover, mills had bought coking coal at an even higher $290/t in April. Since the fuel is used at a time lag of around three months, this cost increase also possibly got factored into August prices.

BF-route rebar impacted by global cues: On the other hand, longs prices remained under pressure both domestically and globally. In India, the induction furnace mills enjoy 65-70% of the rebar market. Here, prices took a 5% increase m-o-m in August.

However, the story was slightly different for blast furnace rebars. For one, the global long steel market was slow, putting pressure on producers. Demand for rebar and wire rods was weak as construction activity has slowed globally. Plus, a crop of new exporters - Algeria, Egypt, the UAE and Saudi Arabia - are in the market with very aggressive offers, rendering Indian ones unviable. This, in a cascading effect, impacted BF rebar prices, leading to hardly any exports activity. The only silver lining was the decent project segment demand.

Outlook

Automotive sales are likely to remain strong in October-November, because of the festive pull. Rural demand has picked up after prolonged stagnation. But, insufficient rainfall in the final phase of the monsoon can tip the balance. HRC exports may pick up too as EU buyers return. September has already seen an increase in list prices of HRC and CRCs.

In rebar, the global macro-economic factors are not likely to change soon and will keep offers under pressure. But domestic demand is seen picking up, propelled by a resurgent construction sector in the third quarter.