Indian HRC-CRC spread narrows to 9-month low

The price spread between Indian benchmark hot rolled coils (HRCs) and cold rolled coils (CRCs) has hit a nine-month low of INR 8,000/tonne (t) ($ 108) on Sept 21. The last time the spread had hovered at this level was in Dec'20, at around INR 8,850/t ($ 119). The spread had widened to a record high of over INR 16,000/t ($ 215) in Jun '21.

Data maintained with SteelMint reveals, the last three months since July have seen average monthly CRC prices falling steadily from INR 79,500/t in July to INR 77,500/t in August and INR 73,400/t in September.

Also, while HRC prices m-o-m have been slightly more range-bound, CRCs have been more volatile. For instance, since Jun '21, when the spread widened to a record high, CRC prices rose m-o-m over May'21 by 2.29% against HRC's 1.66%. In Jul '21, CRC prices dropped -4.61% against HRC's -3.46%. Aug '21 shows CRC prices dipping -2.29% while HRCs rose 2.72%. On Sept 21, HRCs dipped -1.71% against CRC's much deeper -5.39% drop, which narrowed the gap sharply in this month. The prices mentioned exclude the 18% GST.

Why did the spread widen?

• Exports influence domestic prices: The spread had widened to over INR 16,000/t levels in June essentially because exports were extremely buoyant at that time, particularly from Europe, unleashing its pent-up auto segment demand as it came out of the pandemic. HRC and plate exports rose from 0.32 mn t in Feb'21 to over 0.81 mn t in Mar'21 and have maintained an upward trend till Aug '21. But then HRC exports have traditionally been on the higher side compared to other flat products. Interestingly, CRC exports started ballooning steadily. From under 30,000 tonne-levels till Feb '21 they shot up to 85,682 t in Mar'21, hitting 0.18 million tonnes in Aug '21.
  
  

Not surprising that the average HRC FOB Index price rose from $765/t in Mar'21 to $926/t in Apr'21 and then crossed the psychological barrier to $1,027/t and $1,030/t in June and July respectively. Higher export prices pulled up domestic prices too. Trade level HRC prices in May-July were high, with especially CRCs hitting record highs of around INR 80,000/t levels.

• China's export rebate withdrawal: The country removed the export rebate on HRCs from 1 May'21 and on cold rolled and galvanised products from 1 Aug'21 to keep its finished steel within its shores against a backdrop of crude steel output cuts. This move supported Indian exports because globally end-users were not keen to book Chinese cargoes which became costlier. China's steel exports have seen a steady drop from 6.46 mn t in June to 5.67 mn t in July and 5.05 mn t in August. China's move gave Indian mills further scope to export in these months.
  
  

Why did the spread narrow down?

• Muted demand from South East Asia: However, with Europe quotas exhausted, and demand from South East Asia, a traditional export destination, subdued because of Covid lockdowns, export bookings were muted since July, with prices dropping off to $895/t in this month, rising a tad to $905/t in August and then weakening to $875/t in September, dragging down domestic flats prices, especially of CRCs.
  
  
• Merchant mills resumed output: The merchant cold rolling mills, most of which had been edged out of business by the primary mills' upgraded technology and lower prices, returned to the market on seeing CRCs fetching such high domestic prices April-May onwards. With greater supply injection in the market, CRC prices were impacted, especially in the last couple of months, eroding 5% in September, m-o-m.
  
  
• Automotive deceleration: A few automakers had announced production cuts in September because of chip shortage, including Maruti Suzuki (60%) and Mahindra and Mahindra (40-50%). Demand from auto and auto ancillaries slowed down in August-September. Interiors and exteriors of cars are generally using CRCs.
  
  

Outlook

China is expected to reduce output and exports, especially of hot dipped galvanised iron (HDGI) since these are power-intensive products. Korean HDGI mills have already raised their offers in anticipation of Chinese volumes falling in the coming months. Local mills in China have stopped selling HDGI, waiting for further market directions. Indian mills could benefit from this scenario by exporting higher volumes of CRCs and HDGI at meatier prices.

The festive season may boost auto and consumer durables sales in India, although the latter is not a large flat steel consumer. India's largest carmaker, Maruti Suzuki, anticipating higher demand, has asked its vendors to return to levels of production planned earlier. It also plans to increase production in October-November and has told vendors they will recover lost volumes in the next 3-4 months which spells good news for steel.

Market participants are unclear on whether the spread would widen. But overall prices of both CRC and HRC are likely to increase. HRC prices are being supported by increased housing demand.