What can Indian steel industry expect in Oct?

• Production likely to normalize as demand rises
  
  
• Exports to remain subdued till duty is withdrawn
  
  
• Tier 1 mills to feel currency slide pressures
  
  

Morning Brief:

Production to normalize?
Crude steel output has improved after dropping in June - when mills desperately wanted to balance out supply against tepid demand and the halt in exports. Output rose to remain above 10 mnt in both July and August as mills attempted to normalize production. Even though optimum capacity utilization levels have not yet been reached, it is expected that the same will be effected by October. Producers are still wary though, since there is not sufficient demand in the domestic market for absorbing that 20-odd million tonnes of exports.

Exports to remain under pressure
As expected, steel (finished and semi-finished) exports out of India have taken a major hit since the 15% tax was slapped in the third week of May. Volumes, which averaged 1.5 mnt per month, plunged to 0.50 mnt in August as per SteelMint data and are expected to sustain at these levels till the export levy is withdrawn and global markets recover. However, SteelMint understands that the government is not keen to withdraw the tax in Q3 on fears that demand pull factors will push up prices, and lead to inflationary pressures.

At present, as per sources, overseas sales sentiments have shown a marginal improvement on the back of the mill closures in Europe and supply disruptions seen from Korea. But, unfortunately, there are no significant enquiries yet from Europe. "Exports are still a very unexciting area," confided a source.

Imports not to hit significant volumes
It is rather intriguing that imports are not rising despite being competitively priced. Some deals may happen but will not be of significant volumes because of a few reasons. One, Russia does not have high allocations for exports. Two, Korean mills themselves are struggling with production due to cyclone issues and the consequent damage to their plants. Thirdly, Japanese mills are primarily bound in long-term contracts and thus have little to offer for spot sales. Fourth, China may be an option but Indian buyers would obviously prefer to source from free-trade agreement (FTA) countries to avoid duties, if they can. Plus, the lead time from China is longer.

Some semi-finished flat materials are currently being exported from Korea to India and other countries but mainly because the former's downstream facilities have been damaged by the recent cyclone. However, these are being seen as a one-off move.

Prices

Longs: Price gaps between BF:IF-grade rebar had almost bridged to INR 1,000-1,500/t around a month back. However, these are normalizing and may soon touch their usual levels of around INR 2,500/t since IF-grade prices are dipping while BF-grades are rising. The cost pressure for IFs has eased amid the usage of comparatively cheaper Russian coal. On the other hand, BF-grade prices are set to increase buoyed by a Q3 demand push.

Flats: In mid-September, mills had raised list prices by up to INR 1,000/t and are bracing for further hikes of INR 500-1,000/t in October, with the rupee sliding to 82 against the dollar, which will raise coking coal import costs.

Outlook
Starting October, this quarter traditionally sees demand pulling up to reach a peak in the fourth quarter (January-March). The steel ministry, on its part, expects an additional 3.5 mnt demand to be generated in the current fiscal on account of the INR 10-lakh crore government-propelled infrastructure push. Since the first two quarters had been rather quiet, dampened by the export tax and overall lack of domestic demand, it is expected that Q3 will see a major portion of this pent-up demand coming to the fore.