- Export tax impact still exerting pressure on flats
- Production cuts ease supply-demand imbalance
Morning Brief: Flat steel has been trading at a lower premium compared to longs for eight weeks now (since the week ending 1 July, 2022), reveals data maintained with SteelMint. The last time flats traded higher than longs was on 17 June with the week after showing both trading at similar levels. In fact, the flats index has steadily dropped w-o-w since 8 April while longs did waver into the positive zone at times.
Ideally, flat steel prices should be higher than longs — as benchmark hot rolled coils and cold rolled coils have traditionally shown, compared to rebar.
Why are flats trending lower?
The sharper drop in flats prices was a direct fallout of the 15% export tax imposed from 22 May. It may be mentioned that flats comprised over 71% (6.25 mnt) of India’s steel exports of 8.83 mnt in January-July, 2022, SteelMint’s data showed. In FY2021-22 (FY22), flats had comprised over 60% of the 20.64 mnt exported. India produced 120 mnt of crude in FY22 in which 16% went out in the form of finished and semis exports.
The export tax, in a knee-jerk reaction, stalled overseas sales, leading to inventory pile-ups and a sharper drop in flats prices.
On the other hand, long steel prices remained supported because of a few reasons:
a) Around 65% of this market is catered by the secondary mills, which are highly dependent on thermal coal for running their furnaces.
b) They were unable to lower their prices on account of the high thermal coal and scrap prices — two key input materials. These mills are still struggling with such issues.
Composite index range-bound
Meanwhile, the SteelMint India Steel Composite Index remained almost flat in the week ending 19 August, 2022, showing a slight dip of 0.8% to 154.70 points. Both the longs and flats indices were also negligibly down w-o-w.
In fact, the key index has been almost steady for around nine weeks in a row, which is an indication that the production cuts undertaken by mills which have restored the supply-demand imbalance. Most of the mills are still operating at a lower capacity utilization.
The export tax impact actually led to stalling of overseas sales, which in turn led to inventory pile-up and the eventual production cuts by tier 1 mills in a bid to rationalize supply versus demand.
The inventory and price pressures would have been greater if mills had not resorted to production cuts.
Outlook
Mills seem to be labouring under a double whammy. With the export tax still in operation, exports are almost stalled, and mills are under pressure. The question is, for how long can the production cuts continue?
Globally, the steel sentiments are very subdued because of the high energy prices and inflationary pressures and this trend is expected to persist in the short to medium term, exerting further pressure on Indian mills.
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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