India: CRC finds takers but tough road ahead for HRC?

• HRC-CRC spread drops a nominal INR 300/t ($4/t) in May
• HRC on backfoot as exports dry up, inventory builds up
• Buyers for CR products may get active if prices stabilise

Morning Brief: The spread between hot rolled (HR) and cold rolled (CR) coils dropped by a nominal INR 300/t ($4/t) to INR 10,000/t ($129/t) in May, revealed data maintained with SteelMint.

Trade-level exy-Mumbai prices of HRCs and CRCs dropped m-o-m by INR 6,200/t ($80/t) and INR 6,500/t ($83/t) respectively. The almost uniform price drop in both items helped to keep the spread more or less stable.

A key reason behind the price drop was of course the 15% export tax imposition on nine steel products (from the previous nil), including hot rolled coils and cold rolled coils.

Prices showed a steady fall in May especially post-the duty imposition.

Current market scenario
Demand seems to be there at present. “Buyers will return but we need a signal from the steel mills that prices will not fall beyond a particular level,” said a trade source.

Demand for CRC: But demand seems to be more for CR products, 60-70% of which go into automotive and OEM, and 15-20% into drums and barrels. “Requirements for automotive, and drums and barrels are robust,” said a source.

Tough times for HRC: But where HRCs are concerned, it is heard that primary mills are adopting several strategies to lure buyers back to sell and not allow inventory build-up. For instance, one mill has asked end-users to lift material at current prices but said it will issue a credit note in June-end if prices fall further. Another has sought quotes from stockist. But the latter have refrained, being unsure of whether prices have bottomed out.

The trade-level buzz is that prices may fall further from current levels which is keeping buyers on the side-lines.

Exports realizations lower than domestic: Overseas sales are almost nil. Indian mills are offering alloy added steel (which does not come under the ambit of export duty) to conventional markets like Vietnam and Middle East. At current levels, mills export realization for alloy steel HRC would be around INR 53,000-55,000/t on an ex-plant basis. After paying the 15% export duty, realizations are rather low.

Demand recovery on horizon?
Steel manufacturers are expecting a revival in demand before mid-June, especially if prices stabilize at a certain level. “Demand will return even if not in full. At least, those who had stopped buying will resume on the assurance that prices will not go up from the current levels,” the source added.

Factors that may trigger demand:

OEM refill: The OEM and trade segment inventory pipeline has dried up and these players need to resume procurement, especially of high-priced items. They had bought in huge volumes in March amid the Russia-Ukraine crisis, apprehending a price increase, which served them over April-May. They stopped buying even as prices started tapering off from April, expecting further drops. But, now they need a refill.

“Our order book shows buyers are returning, especially in drums and barrels, packaging, furniture etc. Dealer-level enquiries are also trickling in,” said a mill source.

Automotive contracts: Steel-makers expect automotive contracts to get settled at a higher level compared to March, which will push up prices. “The April-June quarter will see contracts settled higher because they have to take off from past contract prices. At least 10% of the production goes into automotive and so this volume will be taken care of at higher prices which will have a trickle-down impact on other segments as well,” said a primary mill source.

Outlook
The price equilibrium may apply more to CR products since their demand seems to be higher at present compared to HRCs. Since mills are desperate to bring buyers back into the market, CRC prices may not fall from their present levels.

However, SteelMint feels, HRCs and plates, which enjoyed the largest share of more than 31% in total flats exports of over 12 mnt last year, still have room to fall from their current levels. This is because exports are unlikely to resume soon. Mills are trying to sell boron-added steel to Europe and other geographies but have not been able to book any significant quantities for June shipments. As a result, inventories are building up at plant level.

“If HRC prices continue to fall, mills will have no other option but to go for maintenance,” said a source.