- Lower capacity utilization helping prices to find support
- Thermal coal keeps secondary longs prices supported
- Russian imports are distress sales and not a threat, say mills
Morning Brief: Will there be a bit of respite for steel prices, especially flats- after a relentless 16-week decline? Do mills see some price pressure easing off, at least in the near term?
Well, the SteelMint India Steel Composite Index was back in the positive zone after two weeks- giving indications of some price support, although it had been moving in a very narrow range especially since the last seven weeks.
The index was up 0.3% to 158 points in the week ending 29 July, 2022. The longs index was up 1.70% w-o-w but the flats index was down 1.2%.
Most primary mills said in their investor’s call that prices have almost bottomed out and there is limited scope for a drop from the current levels.
This scenario can emerge even though coking coal prices have fallen significantly in the first quarter (April-June). Average monthly prices of the Australian premium HCC have fallen to as low as $250/t from $476/t in April, $506/t in May and $374/t in June. Thus, an over 50% drop in July since May levels.
Of course, the impact of eased coking coal prices will be felt in the second quarter (July-September) and also in the third quarter (October-December) if the prices sustain current levels.
“At present, prices seem to have bottomed out across longs and flats and there does not seem a likelihood of these falling further from here in the short term. Even if they do, the corrections will be very minor,” corroborated a source.
Factors that may support prices
1. Production cuts keep inventories low: SteelMint understands that this is essentially a function of the production cuts undertaken by mills in the last one month or so which are keeping inventories low at the mill and stockist levels. Most primary mills have brought ahead their maintenance shutdown, which usually happens around October.
Flats had been especially under pressure because of the double whammy of the 15% export tax and dull domestic demand. The export tax hammer fell harder on flats because around 80% of India’s steel exports comprise flat steel.
2. Imports not a threat: Two key primary mills told SteelMint that yes Russian imports are happening but these are not a threat at the moment. The cargoes booked so far and in transit are some distress sales from Russian mills and thus are a one-off event.
Thermal coal keeps long prices firm: On the other hand, long steel, in which the share of secondary mills is an overwhelming 60-65%, felt the heat of high thermal coal prices. Thermal coal prices started rising especially after the sanctions put a cap on Europe’s imports of Russian gas. The EU embarked on a panic buying of thermal coal as it revived its coal-fired power plants which had been gathering dust for long.
As a result, thermal coal, which is traditionally priced lower than coking coal, became more expensive than the latter, raising the secondary mills’ cost of production. This scenario offered sponge makers limited scope to lower prices. Sponge is a key feed for induction furnaces and this in turn keeps secondary rebar prices firm.
Secondary mills have not had much scope to lower prices which have been fluctuating in tandem with coal prices, especially RB1 and RB3, the hot favourites for blending by sponge makers at present.
Upbeat on export duty removal: Mills are upbeat that the export duty may be removed in the current quarter itself although ministry sources that SteelMint spoke to did not give any such indications.
So far, there is still nothing much to write home about in exports. Sporadic deals to neighbouring Nepal and the Middle East are taking place but at offers that are a far cry from what Indian mills realized from their hefty send-offs to Europe. Current ex-mill realisations of boron-added hot rolled coils delivered to Nepal hover at around INR 50,000/tonne. “These are boron-added to circumnavigate the 15% tax, which, if applied, would drag down ex-mill prices to around INR 45,000/t,” revealed a source, adding: “The production cuts are allowing mills to absorb the lack of export bookings.”
3. The China factor: Prices in China too seem to be bottoming out and achieving a semblance of stability, supported by the production cuts and a healthier demand outlook in the second half.
And, China’s trends get replicated globally.
Outlook
Typically, the demand season resumes from August-September and so mills are upbeat on domestic sales picking up soon enough.
On the other hand, for how long will the production cuts continue is the moot point at present.
JSW Steel, in its investor call, revealed that it will take a 5% drop in production on an annualized basis while JSPL has kept its output targets “firm”.
The India Steel Composite Index
The India Steel Composite Index is assessed on a weekly basis: every Friday at 18:30 IST, as per the weighted average prices based on manufacturing capacity and production.
SteelMint considers the Composite Index with the base year being 3 January 2020 (financial year 2019-2020) and the base value as 100. The Composite Index does not give the absolute price but a trend of the market. The Indian steel industry is broadly classified into the BF-BOF and the electric/induction furnace routes. Keeping this broad classification in view, SteelMint proposes to release the Composite Index by considering both production routes by manufacturing capacity and the production weighted method to compute the index for India. For details click to view the methodology document.
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