India steel index hits 5-month low. Are mills mulling production cuts?

• China demand signals weak, impact global prices
  
  
• Imports become more viable, cause worry
  
  
• Further corrections in prices a possibility
  
  

Morning Brief: In a downwardly-mobile steel market, the India Steel Composite Index hit a five-month low for the week ending 26 May, 2023, closing 1% lower at 148.90 points. The previous week's close had been at 150.40 points.

The India Long Steel Index fell 1.32% to close the week at 146.10 points (148.10). The India Flat Steel Composite Index also dipped but by a slightly lesser 0.65% w-o-w to 151.90 points (152.90 points).

Factors influencing the index

Several interlinked factors are weighing on mills:

1) Softening global prices: Global prices are softening. Chinese Shanghai Futures Exchange rebar and HRC futures have also fallen w-o-w since 15 May.

However, Indian HRC export offers are comparatively still higher. Data maintained with SteelMint reveals that May global HRC offers from China averaged $574/t FOB whereas the Indian ones remained higher by $32/t at $606/t FOB. Sources tell SteelMint that Chinese, Vietnamese and Taiwanese offers are falling much to the concern of Indian mills. Since 12-15% of India's steel production goes out as exports, a drop in the same means diverting of the unsold amount into the domestic market, putting additional pressure on Indian mills.

Against the backdrop of falling global prices, India's export bookings have dropped significantly over the last two weeks. While China has export restrictions to the EU-US (in terms of quotas and duty), Chinese-invested mills in Taiwan (CSN), and Vietnam (Formosa/Hoa Phat) are aggressively lowering offers, thereby further disrupting India's exports scenario in an already subdued market.

2) Imports gain traction, worry mills: Falling global prices are having another upshot. Imports are becoming cheaper pitted against India's domestic offers. Vietnam was last heard offering to Indian buyers hot rolled coils (HRCs) at $620/t CFR for July shipment. In comparison benchmark domestic trade-level HRC prices, even after plunging by INR 900/t this week, are hovering at around INR 56,500-57,500/t ($682-694/t) exy-Mumbai. The market buzz is that imports are likely to gain further traction since the Vietnamese, themselves saddled with inventory, may offer even lower, may be $600/t CFR levels.

Over past two weeks, a significant 70-75% of India's galvanised business has shifted to Vietnam and Taiwan specifically, sources inform SteelMint.

3) Weak demand signals from China a huge concern: The southward-headed global prices, however, are a spin-off of the sentiments emerging from China, the world's largest producer and guzzler of steel, with a more than 50% share in the global production pie. Demand in China is not anything to write home about at present. Spot prices of iron ore (Fe62%) have hit a 6-month low, underscoring weak demand, and liquidity squeeze.

The Chinese currency, RMB, dropped recently to a multi-month low, breaching the 7-per-USD-mark to touch 7.0234- levels last seen in December. The weakened currency will only render steel exports more viable. Even as subdued domestic sentiments in China are driving down steel prices globally, weak demand in other countries is not offering any semblance of support either.

Outlook

With exports down, domestic prices under pressure and imports a cause for concern, Indian mills are facing multiple challenges even as they stare at inventory pile-up in their yards.

Thus, probabilities of a downward price correction are strong. Primary mills may announce price cuts for June sales. Chances are equally strong for production cuts next month to ease the inventory burden.

Such a scenario will also likely have an impact on raw material prices. Sliding iron ore and coking coal rates may see further corrections in the short term.

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. India steel index hits 5-month low. Are mills mulling production cuts. For details click to view the methodology document.