India: Production cuts break flat steel price fall; longs may be under pressure

• India steel index remains stable w-o-w
  
  
• Flat demand-supply balance slowly getting restored
  
  
• Ease in iron ore supply, global sentiments to pressure longs
  
  

Morning Brief: The SteelMint India Steel Composite Index remained almost stable this week, dipping a negligible 0.1% to 159.7 points on 15 July, 2022.

Demand-supply balance restoring in flats
Interestingly, the India Flat Steel Composite Index, which had been in a free-fall since 8 April, managed to remain stable after 15-odd weeks at 156.9 points.

The key reason behind this scenario is that the production cuts from the primary mills are paying off, slowly restoring the supply-demand balance.

In a latest development, Steel Authority of India's Bhilai Steel Plant (BSP) has opted for capital repairs of three of its blast furnaces. As a result, crude steel production has dropped from 19,000 tonnes per day (tpd) to 11,000 tpd. Earlier, a large mill had indicated that its flagship plant in Karnataka was going to operate at around 80% capacity utilization to counter the drop in demand.

Thus, July will likely see a 15% decline in crude steel output and support flat steel prices from here.

The question that is often being bandied around at present is, 'have prices bottomed out?' Well, the production cuts do give indication that the free-fall in flat steel perhaps has been stalled.

Iron ore supply may allow longs price correction
On the other hand, the Long Steel Composite Index, which had been gaining ground for about a month, edged down marginally by 0.18% to 162.3 points.

Long steel prices were increasing in the past few weeks mainly due to a short supply in iron ore and coal, which kept prices of both input materials raised.

Iron ore: Earlier, OMC had increased the base price at its auctions, which led to lesser lifting of material. But, the base price at its upcoming auctions has been reduced by INR 150/t. NMDC also lowered its July prices by up to 15% as its June sales fell 20% m-o-m over May. Thus, mills may now procure higher volumes of the ore.

Coal: Coking coal prices have dropped from their highs of $600/t FOB in March to as low as $245/t as demand from mills became muted amid the onset of the monsoon, and the slapping of the 15% export duty and whose benefit may be felt in the next quarter as the fuel is procured via quarterly contracts.

However, portside thermal coal prices have remained firm. The South African RB1 has traded above $300/tonne FOB-mark for the last one month. The RB2 has remained under $300/t FOB and RB3 above $250/t FOB.

The firmness stemmed from supply issues at South African rail operator Transnet, while domestic supply from CIL has been diverted to the power utilities, leaving the non-power units dependent on imports. Thermal coal factors did not allow longs prices to correct sharply.

Outlook
While flats steel may stay supported, further increase in prices of longs is limited. However, HRC import volumes from Russia spurting since June. These import volumes are not significant yet. Nonetheless, these have shaken steel market sentiments. If the volumes gain a critical level, then, obviously, Indian mills will have to reduce their prices to retain the import parity. A downward correction is possible with adequate iron ore supply expected at lower prices.

Moreover, the overall global sentiments are low which may not support demand and prices either. One is the rupee hitting its all-time low of almost 80 to the dollar. Secondly, China's Q2 data shows a worst quarterly performance in two years. Impacted mainly by Covid, the world's second-largest economy grew a mere 0.4% in Q2, missing targets. Chinese steel prices have dropped to near-two-year lows. Prices have corrected by over $50/t in the last week. Such downtrends will have ramifications on global steel prices.

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 but a trend of the market. 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.