India: HRC-rebar spread stays narrow in Apr; rebar performs better

• • Power challenges of IF mills lower longs output and supply
  • BF-grade rebar cashes in on IF output cuts to raise prices
  • HRC prices trend up marginally on comfortable export bookings
  • Spread may stay narrowed till thermal coal shortage at power plants resolved

Morning Brief: The primary mills’ HRC-rebar price spread, which is at a monthly average of INR 5,000/t ($66/t) — tracked from January 2020 — has dropped below this figure since February, 2022, as per SteelMint’s data.

The spread reduced to INR 3,100/t ($41/t) in April, up 41% m-o-m but down 69% y-o-y.

Both HRC and rebar prices remained subdued m-o-m in April but SteelMint notes that trade-level HRC prices rose a nominal 2% to INR 72,900/t ($956/t) in April against INR 71,300/t ($935/t) in March whereas rebar was up a little over 3% to INR 76,000/t ($997/t) compared to INR 73,500/t ($964/t) in March. The prices mentioned above are on an exy-Mumbai basis, and exclusive of GST @ 18%.

What factors kept the gap narrowed?

Electric furnaces grapple with power issues: It has been noticed that the longs segment has performed better than flats. The reason is not far to seek. The rebar segment is dominated by the power-intensive electric furnace mills which control around 65% share of the market. However, these have been plagued by domestic thermal coal shortage since the last few months which has escalated their power costs. Forced by the higher power tariffs/reduced power supply to the industrial sector in many states, they have been forced to undertake production cuts. This scenario led to lesser supply and offered some opportunity to the blast furnace-grade rebar makers to increase their prices while IF-grade prices fell around 5% m-o-m last month.

Infra buying down but not out: Demand from the infrastructure project segment, although subdued compared to previous months, has offered some scope of need-based buying for two reasons – pre-monsoon stocking and compulsion to meet some completion deadlines.

RINL’s production takes a hit: Longs producer RINL’s production took a hit as one of its three blast furnaces is heard to be still out of operation while the second one is working at 50% capacity because of coking coal and liquidity issues. This further reduced rebar supply in the market and helped other large mills to raise their prices.

HRC export bookings keep domestic prices stable: On the other hand, HRCs export volumes, which also influence domestic prices, dropped last month as the EU looked stocked up. Fresh deals booked were sporadic but mills were comfortably placed in terms of shipments on the basis of previous bookings. Hence, HRC prices showed a marginal uptrend last month.

Flats sales subdued: But domestic buyers in flats also delayed their purchase in the face of escalated prices which have risen 32% since December 2021 levels of INR 55,100/t ($723/t).

The chip issue is persisting, along with escalated crude and fuel prices, which have acted as dampening agents for automotive steel demand. Overall, the industry witnessed a de-growth of (-) 6% in FY22. Sales of all four segments of the auto industry are below 2018-19 levels.

Market leader Maruti Suzuki India showed a marginal 1.60% y-o-y dip in production in April 2022 while around 0.29 million units of passenger cars were sold in the Indian market for April 2022, registering an increase of 2.4% y-oy.

Consumer demand sentiments dip: The IIP data for January and February reveal that growth in manufacturing, which comprises ¾ of IIP share, slowed down to 0.8% in February from 1.3% in January 2022. Capital goods output slowed to 1.1% in February against 1.4% in the previous month. Consumer durables output showed a sharp 8.2% drop in February against -3.6% in January and many feel March-April IIP growth will not be very upbeat either.

Outlook
SteelMint expects the HRC-rebar spread to remain narrowed from the normal range of around INR 5,000/t on the basis of the domestic coal shortage which may continue for some time. Production from the electric furnaces across India is thus likely to remain lower and continue to offer BF-grade rebar prices scope to remain firm.

Where flats are concerned, fresh export booking prospects look dim for May. But pre-monsoon domestic demand upturn for galvanized and other flats may keep prices supported.