Morning Brief: Indian HRC-CRC spread hits record low, but may recover soon

The price spread between hot rolled and cold rolled coils narrowed to a record over-two-and-a-half year low since Jul'19, the time SteelMint has been tracing this data. On the basis of monthly average prices, the spread narrowed to a record low of INR 3,200/t ($43/t) in January. In comparison, the same had touched record highs of INR 15,000-16,000/t ($200-214/t) in May-July'21.

Why has the spread narrowed to such record levels?

SteelMint notes it was mainly the depressed CRC prices that narrowed the delta. If the trade-level HRC price drop m-o-m in January was INR 1,400/t ($19/t), then CRC declined a sharper INR 3,000/t ($40/t) last month.

Demand ebb and flow: The story can be traced back to the same time last year, when the second wave of the pandemic had started, leading to lockdowns. At that juncture, mills started seeing a huge upward movement in export inquiries.

Domestic availability at that period was also lower, which supported the higher prices. "Whatever was available got acquired even at higher prices," recalled a source.

That apart, international steel prices had also started rising, which led to higher import inquiries for Indian steel from Europe and other countries. Exports had mainly comprised CRCs which had sharply pushed up prices of the same globally and domestically. For instance, Indian trade level prices had hit record high levels of INR 80,000-83,500/t levels ($1,069-1,116/t) over May-Jun'21.

However, from Q3, the export demand of CRC and coated products had declined, on the back of the chip shortage, dragging down CRC prices to INR 70,200/t ($938/t) and INR 67,200/t ($899/t) in Dec'21 and Jan'22 respectively. The domestic market saw excess availability.

China factor: China's production curbs, energy crisis and Winter Olympics kept demand subdued, which narrowed the HRC-CRC spread in China. Plants and mills in China were hamstrung by inadequate power supply. Most coal-based plants had to either shut down or operate at 60-70% capacity. This led to further production curbs. China produces 50% of global steel and consumes almost as much. Hence, it is a market mover and its trends get replicated globally at a time lag of 1-2 months.

Secondary sales pressure prices: Several primary mills had cleared their secondary stocks through auctions and non-confirmed orders (NCOs) at rates nearly INR 10,000/t ($134/t) lesser than list prices. With the quality of these products as good as primary, there were ready takers for these CRCs. Such aggressive pricing helped to keep pressure on CRC prices.

CRC prices set to recover

However, prices have moderated meanwhile with mills raising list prices end-January on the back of Q4 being a good demand season.

The market feels the spread will widen particularly with CRC prices set to find an upward momentum soon with the chip shortage easing somewhat.

Global prices are also moving up and the delta stands at around $100/t.

Currently, the spread at the market level is at INR 4,500/t ($60/t) against the usual INR 5,000-6,000/t ($67-80/t). However, it is expected to spring back to this level by mid-March. "We would like to see it at INR 7,000/t ($94/t) because of the rising raw material prices. For a standalone galvanizer, the ideal spread now should be INR 4,500-5,000/t ($60-67/t) because the costs of raw materials, fuel and packaging have gone up," said an industry insider.

"The delta should ideally be at INR 5,000-6,000/t. It should scale up now," corroborated another source.

The bullish outlook on CRCs is based on the recovery of several user-industries in Q4. Automotive is seeing some traction because the chip shortage abated a bit. Secondly, demand from the drums and barrels segment, required in the agri/food processing sector, will start seeing an upturn during summer. Thirdly, the market feeds the pre-monsoon demand over February-June, which will raise demand for bitumen drums and construction materials like HRCs for pipes and tubular products. Fourth, the appliances segment is also expected to pick up with the advent of summer. These segments are prominent CRC consumers.

That apart, mills have seen resumption in export bookings which mean that much excess volume will go out of the domestic market. Therefore, Q4 and Q1 of the new financial year will see a continuous upward demand pull in CRCs.

HRC prices will show a recovery because of the increased demand for CRCs, which are ultimately derived from the former. That apart, construction uptick in Q4 will ensure higher demand for pipes and tubes which are sourced from HRCs.

"CRC prices are set to recover in the next 1.5-2 months. Since these had seen a sharper dip than HRCs, their recovery will also be sharper. CRC demand in Q4 is expected to rise 10-15% q-o-q," said a source.

With mills experiencing good export enquiries in Q4, they are confident of offloading CRC volumes left unsold in Q3 which will support higher prices.