Indian rebar prices hit over 10-year highs. What are the reasons?

Indian rebar prices have been escalating. Data, up to the period that SteelMint has been tracking, show that prices touched over 10-year highs recently. Secondary (induction furnace-route) mills' prices are currently at around INR 53,900/tonne (t) ($715/t) exy Mumbai. These had climbed even higher by INR 5,000-6,000/t ($66-79/t) over the last fortnight. In comparison, distributor-level rates of the primary mills' rose by up to INR 4,500/t ($59/t) for Oct'21 deliveries during this period and are hovering at INR 56,000/t ($741/t) (minus 18% GST).

What factors are driving up rebar prices in India?

• Coal crisis: The current coal crisis is taking matters out of the hands of the induction furnace mills, which are predominantly sponge iron-based. They also contribute 60-65% of the Indian rebar market. Domestic coal supply is severely impacted since power plants are being prioritised by Coal India with the non-power sector getting the short shrift. On the other hand, imported prices are going through the roof. As per SteelMint's data, portside prices of the imported South African RB2 grade of thermal coal, which is typically preferred by the sponge-based plants, increased by a whopping INR 4,000-4,500/t w-o-w. Due to steep escalation in an input cost, the IF mills' cost of production is spinning out of control, forcing them to revise their prices upward.
  
  
• Restocking rush: If there is a coal shortage, can a power crisis be far behind? Around, 83 thermal power plants (TPPs) with a combined capacity of 106.83 GW which is a little over half of India's total thermal power generation capacity, had three or lesser days of coal stocks as on 7 Oct, as per latest CEA data. There is widespread concern over power outages which may force many IF mills to shut shop temporarily or curtail production. Fearing a supply crunch amid the peak demand season, distributors have been rushing to restock. "Distributors feel the expected production cuts could lead to a demand-supply imbalance in the market, goading them to stock up," a source said.
  
  
• Uptrend in Chinese rebar futures: Chinese rebar futures were scaling up after the markets resumed post-Golden Week holidays before witnessing some drop yesterday. Chinese rolling mills are operating at lower capacities so billets demand is not too high. If September saw Chinese production cuts as a result of the government diktat, October and November will see mills reducing output due to escalating coal prices and the ongoing power crisis. But, with futures scaling up and the production cuts, Indian mills are optimistic of better billets exports prospects to China and other geographies, a sentiment that is pulling up domestic rebar prices.
  
  
• Lower scrap stocks: Global scrap prices have been upwardly mobile. As per SteelMint's latest assessment, UAE-origin HMS 1 prices to India are up $20/t w-o-w, whereas Japanese bulk offers to Vietnam are up $20-25/t. US-origin HMS 1 and 2 offers to Vietnam have inched up by $5/t. Mills have been avoiding the imported material for quite some time, leading to depletion in stocks. On the other hands, thanks to production cuts at auto majors, domestic scrap generation is down. Tight scrap availability is putting the IF mills at a further raw material disadvantage.
  
  

What to expect

Rebar prices may not fall further from these elevated levels since the coal crisis is here to stay for the medium term. Many forecast it may persist till Mar'22. If that be the case, then production cuts are on the anvil, which will support the higher prices but increase the working capital burden in the trade channel.

Moreover, private infrastructure players executing government projects tell SteelMint that, despite the peak demand season, any further price hike in rebar would mean project costs shooting up and they would be forced to move to the sidelines and await a downward price correction. Mills in neighbouring Nepal, which buy substantial volumes of billets from India, too say they have stocked up ahead of the festive season and further price increases would dent demand.

But the price rise, say the smaller mills, are a function of the coal prices. "If RB2 prices rise further, sponge manufacturers will be on the backfoot and future price hikes cannot be ruled out," said an IF source.

If such a scenario unfolds, the historically wide gap between HRCs and rebar in India, which has narrowing of late, will get further constricted.