Analysis: The Price Spread between Indian HRC- Rebar Narrows, What is driving it ?

The price spread between HRC and rebar prices in the domestic steel market has narrowed since the start of 2018, to around INR 1,000/MT(USD 14/MT) as of today which typically used to be INR 4,000-5,000/MT (USD 56-70/MT) in 2016.

Rising flat steel capacities, stagnant demand for long steel, impact of demonetization, Insolvency and bankruptcy law are the key factors that are driving prices spread to narrow down, let us analyse this in detail.

High disparity between HRC and Rebar production and consumption

It can be observed from the above graph that there is significant difference between hot-rolled products’ production and its consumption against that of rebar production and consumption. While India’s annual hot-rolled consumption is almost half of its production, the difference between rebar production and its consumption is considerably less. This implies that HRC supplies in the country are much higher than its demand thus having a higher negative impact upon its prices whereas in case of rebar, the difference between production and demand is minimal having a lesser negative effect on its prices.

Flat steel capacity additions by Indian steel majors

Two years back i.e. in 2017, the Indian steel manufacturers like Tata Steel, JSW Steel added capacities which increased the supplies (especially of flat products) in the market thus indirectly impacting the price spread between HRC and rebar. While Tata Steel started the commercial production at its 3 MnT Kalinganagar plant in May 2016, within a year the plant achieved full-utilisation levels. Another steel major, JSW Steel increased its capacity at its Dolvi plant from 3.3 MnT to 5 MnT in FY16 which also led to additions in case of flat products in the following years.

Major consolidation of flat steel capacities under IBC

There has been a wave of consolidation in the Indian steel industry since 2017 when India’s apex bank, RBI has issued first list of stressed steel accounts that must be resolved through IBC (Insolvency and Bankruptcy Code) and the consolidation has majorly taken place in case of flat steel capacities. Since the IBC came into effect, 30 MnT of idle steel-producing capacity (about one fourth of India’s total capacity) has been ripe for the picking. The existing stronger players are already using this opportunity to consolidate their position in the country and some new players from other sectors are also entering the fray.

In time span of two years, while Tata Steel have acquired Bhushan Steel (5.6 MnT) and Usha Martin (1 MnT), JSW Steel successfully took control of Monnet Ispat (1.5MnT) and BPSL (3.5 MnT). Another stressed account of Electrosteel Steels (2.5 MnT) has been acquired by a metals and mining behemoth, Vedanta. With this consolidation, the steel facilities that were once underutilised are again back in action resulting in increased supplies especially that of flat products.

Limited expansion by large long products manufacturers and closure of small rebar units

There has been very limited expansion in case of finish long production capacities by the Indian manufacturers in time span of two years. Along with this a lot of small re-rolling mills which were surviving on unaccountable sales have shut down their shop post demonetisation in 2017 and GST in 2018 as the government officials based in different cities are regularly assuring prevention of unaccountable sales which is ultimately affecting the saleable volume. Further, the country’s rebar supplies has also been impacted by the elections in first half of 2019, delays in funding of government projects and dull sentiments in domestic as well as the global market.

Looking at current scenario, consolidation is at its peak in Indian steel sector which will definitely lead to improvement in utilizations of domestic steel mills having large capacities of flat products whereas in case of rebar any major change in its supplies is unlikely given the poor demand from the infrastructure sector which may ultimately result in further narrowing of price spread between the two commodities.