India: Longs may dip further as cost pressure eases; flats to stay supported

• Steel composite index stable w-o-w
  
  
• Longs ease amid lower sponge, coal and scrap prices
  
  
• Flats get restocking feelers from Europe
  
  
• Energy politics may add unknown element to buying trends
  
  

Morning Brief: The India Steel Composite Index is almost stable at 151.30 points for the week ending 23 September, 2022.

The longs index dipped 1.41% to 153 points. However, flats showed a consistent uptick for two consecutive weeks after a freefall since mid-April. The uptick is perhaps negligible. This week, it is up by 0.81% to 149.5 points. But still it indicates that prices have bottomed out.

Why are flats showing an uptick?
There may be a supply tightness in flats, going forward, and for two reasons:

Restocking inquiries trickling in from EU: Numerous steel mills in Europe have shut shop temporarily, singed by the oil and gas prices. Therefore, sources inform SteelMint that there is some semblance of enquiries trickling in from the Continent. "There is a feeling that these production cuts will translate into some transactions. There can be restocking needs in Europe," a source observed.

Supply disruptions from Korea:Typhoon Hinnamor and a consequent fire at POSCO's Pohang works led to temporary stopping of operations. Pohang's main production is flat steel and the main buyers are the EU, Middle East and Asia. While POSCO has gradually resumed operations, some rolling lines, it was heard, could take as much as three months to be fully operational. There can be production hit of 1.7 mnt. In such circumstances, demand for Indian flat products could see some traction overseas.

Trade-level inventories low: There can be some restocking demand since trade-level inventories are low. There is room for third quarter (October-December) optimism because the season supports demand generation in both longs (construction) and flats (festive sales in automotive and white goods).

The government is upbeat of an additional 3.5 mnt of demand y-o-y in Q3.

Why did longs corrected downward?
Longs corrected w-o-w this but marginally because of eased cost push. These include the slide in coal and scrap prices:

Sponge iron prices correct: Prices of sponge iron, a key feed for the induction furnaces, have corrected on the back of the drop in thermal coal prices from South Africa. Average RB1 (6000 NAR) prices are w-o-w down $12/tonne (t) FOB basis to $294/t as per SteelMint data. Prices have been dropping because of the inroads of cheaper Russian coal. From a volume of 0.33 mnt in May, these have increased exponentially to 0.92 mnt in June, 1.33 mnt in July, 1.96 mnt in August and are estimated at 1.37 mnt till date in September.

Imported scrap prices drop: Suddenly, there are not too many takers for ferrous scrap globally. South Asian countries are not in a position to buy material. For instance, Bangladesh is struggling with LC issues and sliding currencies which led to a sharp drop in scrap imports. Pakistan is grappling with floods while Turkey, the largest ferrous scrap consumer, is seeing a slowdown in steel production amid spiralling energy prices. As a result, there is an influx of cheaper material into India.Trade sources report that Indian buyers have booked over 20 bulk vessels (about 750,000 t) of scrap from US and Europe in the last two months.

Outlook
SteelMint feels, although demand may improve, longs could see further corrections as both sponge iron and scrap prices will be under pressure. As more competitively priced Russian coal enters India, sponge players would have it easy.

Secondly, a significant amount of bulk scrap will land in India in October further easing price burden. Hence, the BF-IF route rebar spread, which had closed, will become wider again.

Flats prices have bottomed out and will not see further drops from here, supported by festive downstream demand at home and feelers from overseas.

But, having said that, energy politics are persisting and is the X factor that could drive inflation and buying trends in Europe, while India is slightly better positioned in terms of cheaper raw materials.

The India Steel Composite Index
The India Steel Composite Index is assessed on a weekly basis: every Friday at 18:30 IST, as per the weighted average prices based on manufacturing capacity and production.
SteelMint considers the Composite Index with the base year being 3 January 2020 (financial year 2019-2020) and the base value as 100. The Composite Index does not give the absolute price. The Indian steel industry is broadly classified into the BF-BOF and the electric/induction furnace routes. Keeping this broad classification in view, SteelMint proposes to release the Composite Index by considering both production routes by manufacturing capacity and the production weighted method to compute the index for India. For details click to view the methodology document.