- Steel exports drop sharply in Q1 on steep tariff
- Major domestic mills report decline in steel production in Q1
- Prices set to stabilise in Q2 as domestic demand recovers
Steel prices in India seem to have bottomed out and further decline is unlikely, while emerging green shoots of demand are expected to keep prices supported in the second half of the year (H2CY’22), as per indications supplied by key domestic steel producers in their performance reports for the first quarter of the current fiscal (Q1FY’23).
Steel majors JSW, JSPL and Tata Steel have highlighted in their first quarter disclosures that domestic steel demand has improved from the automotive, construction and consumer durables segments. The drop in domestic steel prices has naturally led to higher buying interest. While the steep export duty on steel and raw materials impacts capacity utilization, steel producers are looking at value-added exports.
Although India’s steel exports fell sharply, q-o-q, in Q1FY’23, the export tariff may be a temporary measure to contain inflation and will most likely be removed once the domestic market stabilises. However, India’s steel consumption fell by nearly 6% on the quarter in Q1.
Inflation concerns
Global inflation was triggered by the Russia-Ukraine war and steel prices rose sharply from March 2022 onwards due mainly to panic buying. But sanctions on coal imports and rising natural gas prices stoked energy inflation in Europe, which dampened buying sentiment. Steel producers were forced to cut production due to surge in costs.
On 27 July, the US Fed increased the policy rate by 75-basis-points. This rate increase, coupled with earlier actions in March, May and June, has now pulled up the central bank’s overnight interest rate from near zero to a level between 2.25% and 2.50%, as the USA battles inflation.
The prolonged COVID-related lockdowns in China impacted steel prices, while the mortgage loan crisis in the property sector affected steel demand and new construction. Hostile weather conditions in many parts of the country have adversely impacted construction activities.
The domestic steel industry was hit by falling global steel prices and benchmark hot-rolled coil (HRC) prices have dropped more than 20% since late April, as per SteelMint assessment.
Prices stabilise
Domestic demand has recovered not just due to drop in prices but also fall in production and supplies due to the steel export tax. Major producer JSPL informed in its quarterly report that there is a shortage of steel plates in the market. Maintenance shutdown at the plate mill in JSPL’s Raigarh plant also hit production.
JSW Steel informed that it preponed maintenance in Q1 to stop inventory from building up. The anxiety to clear inventory due to drop in steel prices has affected supplies, which is expected to keep prices supported.
Further, it has been observed that major Chinese mills are losing profits due to higher coal prices, as a result of which either they would cut production or increase steel prices. As China seeks to control steel production, the steel oversupply situation should normalise thereby supporting steel prices. In fact, prices are already recovering from low levels.
In the domestic market, moreover, high thermal coal prices and lack of sufficient coal availability is pushing induction furnace (IF) steel prices higher, as producers seek to adjust cost pressure. In fact, the different between blast furnace (BF)-grade construction steel rebar prices and IF rebar prices have shrunk to around INR 3,500/t.
Therefore, going ahead, the primary mills are unlikely to reduce prices further.
Key performance pointers
Among the steel majors, JSW Steel’s standalone crude steel output stood at 5 million tonnes (mnt) in Q1, up 22% y-o-y compared with 4.10 mnt in Q1FY’22. Flat steel production stood at 3.60 mnt while long steel output stood at 1.04 mnt. The company achieved steel sales of 4.03 mnt during the quarter, down 21% q-o-q as against 5.11 mnt in the previous quarter. Sales rose 12% y-o-y compared with 3.61 mnt in Q1FY’22, although exports dropped 26% q-o-q.
Tata Steel reported production at 4.73 mnt in Q1 FY’23, largely flat compared to the previous quarter. Production rose 6% as against 4.45 mnt in Q1FY’22. On the other hand, JSPL’s production declined by 6% to 1.99 mnt as against 2.11 mnt in the previous quarter. Production dropped marginally by 1% y-o-y as against 2.01 mnt in Q1FY’22.
However, production is expected to recover as global coking coal prices have fallen below $200/t FOB Australia levels from the average of over $400/t in Q1. Coal consumption cost is likely to go down by $40/t. The prices of coal that end-users are buying will edge lower by $150-160/t compared to Q1 FY’23.
The drop in steel raw materials prices will relieve the cost pressure on producers in Q2.
Outlook
It has been forecast Indian steel prices seem to have stablised and pent up demand as well as demand from projects, which was delayed, seem to be recovering as steel prices have fallen. Demand from the automotive sector, too, has improved. Therefore, production of all the leading steel producers is expected to improve in Q2.
Inventory restocking is likely to gather momentum post monsoon and owing to the early arrival of the festive season this year, domestic steel prices are expected to receive a boost.
Moreover, the pandemic situation in China has eased which is expected to release pent-up demand. Moreover, the government’s stimulus to boost the property sector is likely to drive market sentiments.
Steel Users Federation of India (SUFI) and SteelMint are jointly organizing “The Indian Steel Conference 2022” on 25th Aug 2022 at ICH, Bombay Stock Exchange (BSE), Mumbai, India. Join us to discuss the changing dynamics of the Indian steel industry, steel price outlook, hedging the price risk and finding demand drivers in medium to long term.
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