- Spread narrows as flats feel price pressure while longs stays supported
- Globally too spread narrows amid weak demand, high energy prices
- Trend likely to sustain in the short term
Morning Brief: The price spread between benchmark hot rolled coils (HRC) and BF-route rebar in June 2022 reverted to almost a two-year low at INR 1,600/t ($20/t). Similar levels were last seen in August 2020, at INR 1,550/t ($19/t).
The spread started narrowing from December 2021 but tapered off sharply from March this year, post-outbreak of the Russia-Ukraine crisis.
If the spread had dropped 50% m-o-m in February, it again lost another 50% in March, recouped a little in April to fall steadily till June.
Reasons for the narrowing spread
1. Export duty impacts flats harder: An immediate key reason for the narrowing spread is the impact of the 15% export duty slapped on steel to cool down inflation. Flats, especially hot rolled coils (HRCs), comprise almost 80% of Indian steel exports. So, obviously, the export duty impacted flat steel, especially HRC exports, harder. So far into 2022, flats have comprised 71% of India’s total exports of 7.30 mnt over January-May. Within flats, HRCs enjoyed 61% share. Thus, with exports almost stalled, steel producers have had to correct HRC prices more significantly to lure back domestic buyers. June’s average monthly rebar prices fell 10% m-o-m to INR 60,400/t ($763/t) against May’s INR 67,800/t ($856/t) while HRCs lost a little more, by 11%, to rest at INR 62,000/t ($783/t) from INR 69,800/t ($881/t) in the previous month.
2. Higher energy prices raise longs production costs: Domestic thermal coal supply tightness coupled with rising summer power demand led Coal India to initiate an imported coal procurement policy for power plants. Meanwhile, imported thermal coal prices have hit record highs while the non-power sector remains starved of domestic coal. Such a scenario has raised production costs of long steel and sponge iron manufacturers. It may be mentioned that 60-65% of long steel is manufactured by the secondary mills (electric furnaces, which use sponge iron as a feed).
Rebar prices from primary mills have already fallen a steep over 20% since the last three months, narrowing the spread with IF-route material. Thus, primary mills, encouraged by the firm IF-route prices, are now keen to not drop prices further.
3. Lower capacity utilization of secondary mills: The high power tariffs and coal costs have forced the electric furnaces to curtail production by around 30%. This has led to a drop in rebar production and supply, a factor that is helping prices to stay firm.
Pre-monsoon buying lent support to rebar prices: Post-the 15% export duty imposition, buyers had receded to the sidelines awaiting market clarity and further fall in prices. The lack of buying led to a drop in distributor-level inventories. But pre-monsoon buying by projects lent support to prices.
Is India mimicking a global trend?
Globally, the rebar-HRC spread has narrowed. Data from the world’s largest steel consumer and producer, China, shows that prices of HRCs and rebars have been dipping since April, because of China’s weakened domestic demand amid its Covid surge and beleaguered construction sector. It fell from RMB 353/t ($52/t) in April to RMB 203/t ($30/t)in May and RMB 258/t ($38/t) in June.
The spread in Europe too has narrowed due to weak demand for steel. The weakness stems from two factors: 1) The high energy costs are impacting steel user-industries. 2) EU’s panic buying, especially of HRCs, with the onset of the war, has end-users stocked up, leading to lacklustre demand.
On the other hand, the high energy costs are affecting production from electric arc furnaces globally, which are power-intensive, keeping long steel prices raised.
Near-term outlook
The spread may narrow down further since BF-grade rebar prices are expected to increase soon and remain elevated for some time. Also, the production cuts across primary and secondary mills will keep the prices firm.
Where HRCs are concerned, prices are expected to be under pressure till exports revive, which is not likely in the near term.
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