India's HRC-rebar spread narrows to all-time low in May'24. Is trend sustainable?

• Rebar rally puts prices at 13-month highs
  
  
• Raw material cost push hits both longs, flats
  
  
• HRCs languish at four-month lows in May
  
  
• Longs prices may ease as supplies normalise
  
  

Morning Brief: The reverse swing seen on the HRC-rebar pitch became stronger in May 2024. The spread between hot rolled coils (HRCs) and blast furnace-grade rebar last month reversed - or narrowed - to possibly an all-time low of INR 4,200/tonne ($50/t), reveals data maintained with BigMint.

This means, rebars were more expensive than HRCs in May, (and also April). Usually, HRCs are sold at a premium of around INR 4,000/t ($48/t) to rebars.

However, prices of both rose m-o-m in May. But, the spread narrowed essentially because rebar upped 7% to INR 58,300/t ($699/t) against INR 54,600/t ($655/t) in April. HRCs, on the other hand, rose less than 3% to INR 54,100/t ($649/t) compared to INR 52,600/t ($631/t) in April.

Rebars are hovering at a 13-month high while HRCs are languishing at 4-month lows.

Factors that influenced the reversed spread

Production cuts, pre-poll demand support rebar: Rebars found themselves on a stronger wicket from Q4 (January-March) of FY'24 onwards. The initial part of the year saw inventories piling up amid tepid demand and slackening sales. This led tier-1 mills to opt for maintenance schedules and production cuts from January onwards - initiatives which bore fruit from March onwards. Three factors worked to bolster rebar prices from here onwards till May. One was the drop in supply amid the production cuts. Second, was some pre-election restocking as buyers wanted to avoid poll-related liquidity crunches and supply disruptions. Users, especially in projects, did some need-based restocking toward the year-end.

RINL production hit by Gangavaram strike: The one-month long workers' strike at Gangavaram Port in Andhra Pradesh led to pile-up of coal cargoes. This impacted supplies of coking coal to long products PSU major RINL. BigMint data reveals, of the 7 mnt of coking coal imported in FY'24, RINL's share was at 3.8 mnt. Thus, supplies were stalled, which led to a 32% m-o-m drop in RINL's crude steel production in April and a consequent tightness rebar supplies in the domestic market. This further helped to keep prices supported.

IF mills cut production amid less coal supply: Induction furnace-route rebar prices threw up a mixed trend but overall went up 5% m-o-m in May. The month witnessed a scorching summer which fired up thermal coal prices, used in power generation. Port-side Gangavaram South African RB3 prices rose 3% and CNF Gangavaram, by 11%. Importantly, most thermal coal supplies, domestic and imported, got diverted to power generation for household supplies, leaving IF producers with no option but to cut production.

Demand was lacklustre after a buying spree in March-April, impelling sellers to offer discounts in May despite production cuts. Inventory idling time increased from 6-8 days in April to 8-10 days in May. But the hike in IF rebar prices supported BF material since the former commands 65-70% of the market.

Maintenance support for tier-1 mills: Tier-1 mills raised list prices of HRCs and other key flat products by around INR 1,500/t ($18/t) for May sales amid a rise in raw material and input prices. But demand was tepid, which forced some mills to put their hot strip and cold rolling mills on maintenance which reduced supply and helped to keep prices supported. Plus, imports had eased somewhat, encouraging mills to keep domestic offers firm.

Exports dull, realisations lower than domestic: Flats exports remained a damp squib in May, forcing mills to withhold offers and focus on domestic sales. The BigMint HRC export index remained inert in May at $560/t FOB east coast India, which was lower than the average domestic INR 54,100/t ($649/t) realisations.

Raw material cost push: The cost of most raw materials rose in May, impacting upward both longs and flats.

For IFs, billets, as indicated by the Raipur index, increased 4%, supported by rebar, in a circular movement. The pellet-based sponge iron index from Raipur rose a marginal 1% m-o-m and CDRI from Rourkela, by 3%. But pellet prices increased 9% and domestic scrap, 5%. The latter was impacted the Assembly elections in some states which reduced generation and collection amid liquidity issues.

For tier-1 mills, iron ore fines and lumps were up 7% and 8% respectively and silico manganese by 25% m-o-m in May.

Outlook

The narrowed spread is not sustainable since RINL has resumed production which will normalise rebar supplies in the market and pressure down prices. Secondly, monsoons are approaching and will also dampen longs prices as construction activities slow down till September.Thirdly, with the easing of the summer heat, thermal coal may also cool down, giving reason to IFs to resume production and lower prices.

HRCs may remain range-bound as there is optimism of a post-election demand. Or, dip a bit, as imports are resuming with the renewal of Vietnam-based Formosa's BIS licence.