India: Why did BF-IF rebar spread narrow to a historic low in Oct?

• Prices of BF-grade rebar show steeper fall but stay range-bound for IFs
  
  
• Input costs drop for primary mills, rise for secondary players
  
  
• November may see spread reverting to normal levels amid erosion in IF-grade prices
  
  

Morning Brief: The spread between blast furnace (BF) and induction furnace (IF) route rebar in October 2022 was at a record low of INR 800/tonne ($10/t), as per data maintained with SteelMint. The average monthly BF-route rebar prices in October were at INR 56,400/t ($691/t) and IF grade, at INR 55,600/t ($681/t).

The trend reveals that BF-grade prices fell more sharply compared to IF-route since April. For instance, BF-grades fell by a steep INR 16,500/t ($202/t) from a high of INR 72,900/t ($893/t) in April this year to a low of INR 56,400/t ($691/t) in October, whereas IF-grades fell a little less hard from a peak of INR 68,400/t ($838/t) in March, 2022 to INR 53,700/t ($658/t) in June 2022, fluctuated in a narrow range to recoup to October's INR 55,600/t ($681/t). Overall, IF-route rebar dropped by INR 12,800-14,700/t ($157-180/t).

Reasons for the spread narrowing

1. Low global demand: Although the 15% export tax kept billets out of its purview, mills could not reap the benefits because global steel demand plummeted soon after the post-war panic buying had subsided. Some months later, around September, Europe showed a propensity to buy billets, wire rods and rebar cheap from South East Asia as it fought off its escalated energy costs.

As a result, the larger Indian mills started experiencing inventory pressure and were compelled to correct their prices downward as well as undertake maintenance shutdowns to balance out the demand-supply ratio.

Coking coal prices cool down: Coking coal prices started coming down from their record peaks of $506/t FOB in May, 2022 to rest at $288/t FOB in October. Moreover, primary mills also bought cheaper Chinese coke. Imports of coking coal from the US surged 150% and from Russia by 50% in January-September as mills diversified their sourcing countries to ensure raw material security. Lower input costs also forced primary mills to tame their prices further.

2. IF mills grapple with high input costs: On the other hand, for the induction furnaces, thermal coal and scrap prices were high which compelled them to hold on to their prices and in October, actually increase the same a tad, by INR 800/t m-o-m. Portside benchmark imported thermal coal prices averaged almost INR 19,000/t over April-October compared to less than INR 15,000/t earlier in the year. Domestic scrap prices too averaged nearly INR 41,000/t compared to under INR 38,000/t in January-February. Higher input costs forced the IFs to cut production and keep their prices range-bound.

3. Project segment prefers BF-grade: SteelMint also heard that, in the last few months, primary mills' rebar offers became so competitive that the project segment bought more from them than secondary. This buying vacuum saddled the IFs with inventory and also resulted in output cuts, which further helped to keep their rebar prices firm. For instance, BF-grade prices over June-October averaged INR around 57,500/t ($704/t) and IF-route, nearly INR 55,000/t ($674/t). The spread started narrowing steadily from INR 3,800/t ($46/t) in July to INR 800/t October as BF prices dropped steadily but IF prices stayed more or less bolstered.

Outlook
The export duty removal has created positive sentiments in the market. Pellet exports have resumed which indicates domestic pellet prices would also rise in tandem. In a cascading effect, sponge iron prices, which had been falling over the last couple of months, would possibly rise again. Thus, the price fall in IF-route rebar, seen from mid-November, on account of the injection of bulk imported scrap which is cheaper from domestic, may be arrested on the back of higher pellet and sponge iron costs.

But overall, since secondary prices corrected steeply since mid-November, the spread may revert to normal levels of INR 4000/t or so.