India: Steel price index drops 1.5% w-o-w; but prices may have bottomed out

• Composite steel index drops 1.5% w-o-w
  
  
• Production cuts pay off for flat steel, demand flicker seen
  
  
• Thermal coal keeps longs supported
  
  

Morning Brief: In the week ending 5 August, 2022, the SteelMint India Steel Composite Index dropped 1.5% to 155.60 points. The longs index was down 2.17% w-o-w while flats dipped 0.90%.

Factors working in flat steel's favour

Production cuts pay off: Ministry of steel figures show that India's crude steel production dropped 10% m-o-m in July, which restored the demand-supply imbalance brought about by the 15% export duty which rocked the exports boat. With exports stalled and the domestic market unable to absorb that 1.5-odd million tonnes per month, inventory had started piling up with mills after the third week of May. But the production cuts allowed the inventory to at least drop to comfortable levels.

Restocking demand: A flicker of hope is seen among producers and sellers as a semblance of buying, absent for a substantial period, has returned to the market. The reason is the absence of inventory at the trader level due to lack of stocking. Moreover, auto contracts have been closed, re-opening the door to procurements from this sector.

However, mills had indicated that this faint onset of demand will not be enough to push up prices and these may be rolled over for early August sales. The trade-level buzz too was there could be a marginal downward correction in flats - across mills and stockists - early next month.

And sure enough, mills' prices of flat products dropped by INR 3,000- 3,500/tonne ($38-44) for early August sales. July's average monthly HRC prices were at INR 61,000-62,000/t (~$780/t) and CRCs, at INR 68,000-69,000/t (~$865/t), ex-Mumbai and minus 18% GST). Post-revision, these hover at INR 58,000-58,500/t and at INR 65,350-66,500/t respectively for early August.

Trade-level benchmark HRC prices too have fallen, as per SteelMint's latest assessment, by INR 400/t w-o-w to INR 57,000-58,000/t and CRCs by INR 100/t to INR67,000-68,000/t.

However, it may be noted that the decline was significantly lesser compared to the steep drop of INR 7,800/t ($99/t) in HRCs and INR 9,400/t ($119/t) in CRCs from May to June.

Factors working against flats

Russian imports still a bother? Some of the Russian HRC cargoes booked earlier are in transit. The currency is a challenge since these payments are being made in Chinese yuan and then Russian rouble, which is not offering arbitrage advantage. But buyers say they can manage the pricing aspect since these cargoes are cheap. As a result, they are exploring Russian import opportunities in billets, sponge iron etc and not just HRCs.

Some volumes of Russian HRCs had been booked by Indian buyers last month at $600-650/t levels CFR which worked out cheaper than domestic.

Declining raw material prices: Another key factor working against flats is declining raw material prices. Imported hard premium coking coal from Australia has plunged to $209/t CNF in early August from record $506/t CNF in May 2022, down over 55%. However, these prices will be factored in in Q3 since these are settled as quarterly contracts and the effect takes place at a lag of around two months.

The Odisha fines index (Fe63%) dropped from INR 5,900/t in mid-May to INR 3,500/t in end-June but recouped to INR 4050/t in the last one week.

Thus, lower production costs may keep prices under pressure.

Factors keeping longs supported

Thermal coal keeps rebar propped up: Rebar prices, on the other hand, have more or less held firm because of the high thermal coal prices. Ex-Mumbai prices have hovered around INR 57,000/t ($720) in the last one week and averaged INR 58,000/t over the last one month.

Europe's hunger for coal raises prices: Coal prices have now become a function of Europe's gas supply situation from Russia. The key Nord Stream 1 pipeline from Russia's Gazprom is running at 20% capacity, making Europe run after coal like never before and raising prices of the fuel in the process.

In thermal coal, portside RB2 5500 NAR from South Africa is at a steep average INR 18,000/t, while RB1 has averaged $344/t last week and RB1 from RBCT was a tad down, averaging $299/t over last week.

Secondary mills are highly dependent on thermal coal to fire their electric furnaces and with 60-65% of the long products market in their hands, coal is not offering elbow room for lowering prices in the short to medium term at least.

Outlook
SteelMint does not see prices of both flats and longs falling sharply from their current levels.

The only factor that may weaken flats is coking coal but then these prices will get reflected in Q3.

Having said that, September will be a month to watch out for. On one hand, it is traditionally a better month in terms of demand. On the other hand, if the export tax remains implemented, mills will have to take a call on their production cuts. Maintenance shutdowns cannot carry on indefinitely. It is Hobson's choice.

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.