Steelmint’s India steel index drops 15% post- export duty imposition

• Raised production creates slight demand-supply imbalance again
• Sliding raw material prices deter price hike propositions
• Demand uptick likely but prices may remain in bear zone

Morning Brief: The India Steel Composite Index has dropped 15% since the government introduced the 15% export duty on steel intermediaries and other finished products. The tax took effect from 22 May, 2022. On 20 May, just a couple of days prior to the duty imposition, the composite index had closed at 178.8 points. In the latest assessment, for the week ending 2 September, the index closed at 151.5 points, a sharp 15% drop in a little over three months. W-o-w, the index lost 0.8%.

Both the longs and flats indices also dipped w-o-w. Longs by 0.83% and flats by 0.86%. Though these drops are negligible, the important point is that flats have been in a freefall since mid-April while longs have fluctuated.

Reasons for the sustained bearish trend

Several factors have conjoined to create a bearish trend
Covid surge and production cuts in China, global steel demand slump and declining prices, changed trade flows etc. However, the more immediate reason is the recent uptick in crude steel production.

Mills raise production
Mills had no option but to opt for maintenance shutdowns a little ahead of schedule, faced with a triple whammy of subdued home demand, declining prices and stalled exports. However, reducing capacity utilization on a sustained basis is also not a viable solution. Thus, mills started normalizing production from August although these have not yet touched optimal levels. Yet, this sudden spike in crude steel output upset the demand-supply balance a little, leading to a slight glut which did not of course support any hike in prices.

Export tax impact
Earlier, from May, exports became stalled as mills moved to the sidelines, under the impact of the export tax. Steel exports have dropped 30% y-o-y in January-July, 2022. Stalled exports have impacted domestic prices too.

Slide in raw material prices
Both iron ore and coking coal prices have reduced and are not supporting a hike in prices. Iron ore prices have started cooling off ever since the export tax was slapped. The government raised the export duty on iron ore of all grades and concentrates to 50% from the previous 30%. Iron ore with ferrous content of more than Fe58% had already attracted an export duty of 30%. That apart, the government slapped an export duty of 45% on pellets from nil previously. Thus, exports of iron ore and pellets were badly impacted, leading to inventory build-up and drop in domestic prices. That apart, globally iron ore started sliding amid China’s production cuts and global dampening in demand.

In coking coal, the benchmark Australian premium HCC, after hitting its peak, immediately after the war, and sustaining its high levels till May, started sliding as global steel demand slumped on the back of record high energy prices. Even seasonal supply disruption have failed to lift coking coal prices which slid to almost one-year lows of $259/t CNF India in August.

Globally, prices correct
At the very outset, the world was gripped by Covid and before it could recover, Russia declared a war on Ukraine, a geo-political event that seems to show little signs of a truce. It has had widespread ramifications, even on India, since it completely changed trade flows, upsetting the peace-time applecart. The European Union which was heavily dependent on Russia for its steel, coal, iron ore and, importantly, gas, has suffered the most and resorted to panic buying immediately after the war erupted. However, once well stocked, demand dropped. Secondly, high energy prices are failing to lift demand in Europe. From over $1,000/t FOB in May-June, these have been hovering at around less than $700/t FOB since July.

Outlook
Demand has seen a slight uptick and mills are hopeful of a good post-monsoon season ahead. Thus, volumes offtake may increase. But, having said that, the festive season will start in a fortnight’s time in India which will slow down market activities for more than a month. As a result, prices may not see an uptrend in the short to medium term. The view in some circles is that prices may even show a slight dip from present levels in this period.