- Greater exposure to exports impacts HRC more than rebar
- Demand slump, inventory pile up, lower raw material costs keep prices down
- Longs to stay supported, flats may feel pressure in near term
Morning Brief: The spread between benchmark hot rolled coils (HRCs) and rebar hit a 33-month low in August, 2022, reveals data maintained with SteelMint. Both materials are at an inflection point, converging at almost INR 57,000/t ($714/t) – HRC is at INR 57,200/t ($717/t) and rebar, at INR 56,800/t ($712/t), to be precise.
Why has the gap narrowed so sharply?
It is mainly the steeper fall in HRC prices that has narrowed the spread so much. But why has HRC suffered more than rebar?
1. High export exposure: Although HRC prices had peaked in April, they soon went into a freefall with the levy of the export tax and drop in global demand. Soon after steel prices peaked in April 2022, the government stepped in to cool down inflation with the export tax levy on 21 May, 2022. Since flats have the highest exposure in exports, these bore the toughest brunt post-duty levy. SteelMint’s data shows that flats comprised more than 60% of India’s steel exports in 2021 and HRCs more than 50% within flats. In January-July, flats enjoyed 71% of the total steel exports so far and HRCs’ share in flats was the dominant 57%. However, since May-end, exports have been more or less stalled since mills are not finding the 15% export duty viable. Hence, HRCs are seeing the deepest price falls in a lacklustre market.
On the flipside, the share of rebar in exports in 2021 was a minuscule 5% and 2.6% over January-July, 2022 and thus the export duty has not impacted this segment so deeply.
2. Slump in global demand: Spiralling energy prices led to an overall sharp jump in logistics and power costs. This has dampened steel demand from end-user segments in Europe, a key export destination, which has further set back HRC prices within India.
3. Inventory pile-up: The exports setback led to piling up of flats inventory in the system, which impacted domestic prices. On a m-o-m basis, HRCs lost INR 2,100/t ($26/t) in August while rebar a lesser INR 1,500/t ($19/t).
4. Declining raw material prices: Rebar prices are also falling but not so steeply as HRCs. One key reason for the overall drop in steel prices is the decline in raw material costs, especially of coking coal and iron ore.
Thanks to the high energy costs, many steel mills globally are taking production cuts or stalling production temporarily. This may translate into lower demand for coking coal and iron ore and impact their prices negatively. As long as demand remains down from China and Europe, prices of these two inputs may remain low and not support a hike in steel prices, especially of HRCs, for which the EU is a big market. In thermal coal, cheaper Russian imports are already giving secondary mills a breather in terms of production costs.
Outlook
Prices of rebar are not likely to correct very sharply from here essentially because the season will support demand. Of course, for the immediate one month or so, demand may remain sluggish due to the festive season. But, at the same time, with the monsoon receding from India, the construction season will kickstart, which will give a fillip to longs offtake. Inventory depletion is already allowing for need-based buying.
However, flat prices may dip a little further from current levels because the volume of inventory is higher in comparison to longs with little demand pull for support.
Thus, the spread may widen again in the short term.
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