How will Indian steel market unfold in June?

• Exports may remain below 1 mnt in coming months
• Items outside tax purview on exports radar
• Production may drop m-o-m as mills opt for maintenance shutdowns
• Demand to be relatively better than May’s as projects reap benefits of price drops

Morning Brief: The sudden steel export duty re-adjustment on 21 May created unrest in the market as mills lost the exports edge while buyers immediately moved to the sidelines in an already sluggish market, sensing a series of price drops.

The duties were obviously imposed to cool down a heated-up market. But mills explained that the price increases in February-April were mainly due to geo-political factors. Eventually, global prices started falling in May, dragging down the Indian tags in tandem, they reasoned.

Mills eye export of items not in tax ambit
In a direct fallout of the 15% export tax on nine steel products (from the previous nil), including hot rolled coils and cold rolled coils, Indian steel exports came almost to a standstill for the rest of May. Mills became uncertain, seeking clarity on the status of the export deals already executed but not dispatched or for which LCs were opened. After paying the 15% export duty, mills said, their export viability has sharply reduced.

Thus, SteelMint heard, they are mulling exports of alloy-added steel which does not come under the purview of the current duties. They are also exploring exports of semis – mainly billets and slabs — which also do not fall under the export tax ambit.

But, on the downside, the prices reigning in global markets are unattractive for Indian mills. Russians are spoiling the exports party by dumping their steel at very low prices in global markets. For instance, Russian billets, Black Sea FOB, have fallen from a three-month high of $678/t to the current $615/t levels. Prices to Nepal (a key market for Indian mills) have dropped from $800/t CNF Raxaul border three months ago to the current $617/t.

The Chinese too dampened the market with their throwaway offers. From $915/t FOB Rizhao, HRC prices slipped to $780/t levels.

Secondly, 100% of the exports market cannot comprise semis, since the main demand globally is for finished but which has dried up at present.

Indian mills were exporting at an average rate of 1.5 million tonnes (mnt) per month, in financial year 2021-22 (FY22). But this figure will not be possible to reach, under present circumstances, in June or even July. Exports will possibly remain below 1 mnt in these two months.

Inventory pile-up may reach worrisome level
Inventories have started increasing at the plant level, although these have not yet reached critical levels.

But mills fear this volume may reach a worrisome point if exports do not pick up in the short term. They usually sell 15-20% of their production overseas which will not get absorbed in the domestic market. Thus, eventually, they will have to return to the exports market.

Production may reduce in lackluster market
With the market not supportive, mills want to avoid a scenario where they may be unable to sell the volume they produce, which will result in inventory build-up.

Hence, SteelMint heard that mills would not mind opting for maintenance shutdown both at the upstream and downstream level — from crude steel to finished items.

Therefore, production is expected to reduce in June.

Prices to see further corrections
Prices have dropped sharply. In the first week of June, these corrected by around INR 6,000-7,000/t ($77-90/t) m-o-m, and from their peak levels — seen post-the Russia-Ukraine war — by INR 14,000-15,000/t ($180-1930/t).

Prices are expected to fall further in June, especially from the primary mills. SteelMint expects the correction in flats to be higher compared to longs since the latter is dominated by the secondary players who will not be able to lower their prices after a certain level keeping in mind their high production costs at present –thermal coal and power tariffs are still high.

Domestic demand to pick up moderately
Of course, end-users are happy with the export duty imposition for two reasons — 1) They realise mills would be compelled to lower prices without the exports support; 2) With exports down, domestic availability will be higher.

They said the current price levels are comfortable for them. Thus, projects segment demand will pick up in June compared to May amid the price drops. But, having said that, with the onset of the monsoons, which are expected soon, demand will be somewhat subdued. Monsoons reduce construction activity by around 30% and that will translate into lesser sales.

It seems project authorities cannot stock up when prices are low because of two factors: First, monthly procurement is viable. If they buy ahead, capital gets blocked for a long period. Secondly, in a falling market, they would rather wait to see if prices correct further.

Imports not viable
Imports will not be viable despite global prices being low, because domestic prices are weak amid inventory build-up. Mills may be able to peg their offers below imported and end-users would naturally prefer domestic material.