India: Primary-secondary rebar spread narrows as exports decline

The trade level price gap between blast and induction furnace-route rebar, which had widened to a record over INR 10,000/t ($132/t) levels in Nov'21, narrowed sharply in December to around INR 6,800/t ($90/t). Average ex-Mumbai BF-route prices in the current month are at INR 56,000/t ($741/t) against IF's INR 49,200/t ($651/t), exclusive of 18% GST.

Mill-level offers to projects too have dropped to INR 53,000-53,500/t ($701-707/t) to ensure further orders. SteelMint heard.

Reasons for narrowing gap, declining rebar prices

Rebar prices have been dropping off since October. The two key reasons for the narrowing gap are two-fold: 1) Higher inventory pile-up by mills; 2) Dwindling export demand for long steel.

Higher inventory

• Lower sales: This is on account of subdued domestic and exports demand and lack of rakes availability. Two large mills, which habitually export long products, reported higher stocks last month. Rashtriya Ispat Nigam Ltd's inventory rose 41% m-o-m in November on subdued demand. Jindal Steel and Power (JSPL) too showed lesser sales compared to production due to rakes shortage. Its November production was up 10% y-o-y to 6.74 lakh tonnes but sales dipped 5% y-o-y to 5.39 lakh tonnes.
  
  
• Increased production: Over the past six months, primary and secondary mills have expanded capacity or increased production to over 95% but demand has been slack. For instance, total long steel production over Jan-Oct'21 was at almost 44 mn t. In comparison, finished long exports amounted to a mere 2.2 mn t and billets, at 5.38 mn t. In fact, finished long exports, which had been range-bound between 0.25-0.34 mn t over May-Sept'21, dropped to 0.13 mn t and 0.12 mn t over October and November respectively. Billet exports too showed a similar graph, ranging over 0.44 in May to 0.84 mn t in August, but tapered off to 0.35 mn t and 0.27 mn t in October and November respectively.
  
  

Lower export demand

• Rebar, billets exports down: The above data indicates export demand for both billets and rebar has slowed down. Longs export exposure for especially three large mills, which usually ranged from 25-35%, has dropped to 5-10% since last 2-3 months, dealing a body blow to revenues.
  
  
• China demand drops: Of the total 6.54 mn t of Indian billets exports in CY20, China's share was 3.09 mn t. Exports of the same in Jan-Nov'21 was at 5.38 mn t, but China's share dropped to 1.29 mn t. Nepal, on the other hand, is a consistent importer at around 1 mn t because it is heavily dependent on billets for its rebar production.A key reason for weak demand for construction steel from China lies in the Evergrande collapse. The growth rate in China's real estate investment declined, especially in H2. Investment in real estate, which grew 10% y-o-y in May'21, dipped 5.5% y-o-y in Oct'21. In Jan-Oct'21, infrastructure investment was up a negligible 1% y-o-y whereas the m-o-m growth rate remained negative for six months in a row which became a major factor in China's weak domestic steel demand.
  
  

Outlook

Domestic demand in Q4 (Jan-Mar'22) will be relatively better compared to the previous quarters because of two reasons: 1) This is traditionally a better period for construction. There is pressure to meet government infrastructure project targets, which translates into higher demand for construction steel. 2) The previous quarters were a washout because of Covid and monsoon, which has created pent-up demand.

But, SteelMint understands, domestic prices may come under pressure in Q4 since project construction companies are already facing a dent of 2-3% on their margins and may not accept current price levels.

It seems unlikely mills would be able to lift export sales in Q4 because China's real estate sector issues may not resolve so soon. Production cuts, holidays, Winter Games and freezing cold weather will also ensure lacklustre demand from the world's largest steel consumer.

Demand from Hong Kong and Singapore will also be low in Q4 because these geographies are stocked up. "With China not buying, many exporting countries diverted their material to these locations which has dried up short-term demand from here," informed a source.

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