India: HRC-rebar spread narrows in May; longs prices may stay supported

• Spread narrows m-o-m by INR 1,100/t in May
• Longs prices have larger scope to remain supported
• Flats steel loses exports edge, which will exert downward pressure on prices

Morning Brief: The spread between trade-level benchmarked hot rolled coil (HRC) and blast furnace-route rebar prices was at INR 2,000/tonne ($26/t) in May, revealed SteelMint’s data. The spread narrowed by INR 1,100/t ($14/t) m-o-m.

Why did prices drop in May?
Prices of both HRCs and rebar dropped in May, 2022 m-o-m as the entire steel market went into a tizzy with the government slapping export duties of 15% on nine steel products (from the previous nil), including finished items like HRCs, CRCs, rebar, wire rods etc.

Ex-Mumbai rebar prices dropped m-o-m in May by INR 5,100/t ($66/t) to INR 67,800/t ($872/t) and HRCs by INR 6,200/t ($80/t) to INR 69,800/t ($897/t).

Steel producers had no choice but to lower their domestic market prices as they lost their exports edge with the new customs duty getting triggered. They were also unsure of the status of the export deals already executed but not dispatched or for which LCs were opened.

Buyers, on their part, sensing that prices would drop further, immediately adopted a wait-and-watch policy. They anticipated prices would drop, which did happen. In fact, in the last week of May, SteelMint’s India Steel Composite Index saw its steepest fall since inception, by 5.5%, influenced by the sharp fall in both the flat and longs indices.

What is the short-term outlook on HRC-rebar prices?
Market participants are now keen to know, going forward, whether the price fall will be sharper in flats or longs.

SteelMint understands that the fall in long products will be lesser vis-a-vis hot rolled coils. The reasons are thus:

Infra projects to resume buying: With the prices dropping, the infrastructure construction segment is excited in particular. Projects which had been stalled, due to the high steel prices seen in March-April, will resume. The upcoming monsoon will indeed reduce construction activity by around 30%, which happens every year. However, despite this pitfall, there would be some amount of construction material buying, which would keep rebar prices supported to an extent.

Secondary mills disadvantaged by coal, power costs: Secondly, the smaller mills, which hog 60% of the longs market, may not be able to reduce prices after a certain level because of the cost push. Thermal coal prices are still high. Last heard, the RB2 grade of thermal coal, imported from South Africa, and favoured by sponge manufacturers, was ruling at INR 20,000-21,000/t ($257-269/t) at Gangavaram Port. Moreover, electricity tariffs are high for the power-intensive electric furnaces. That apart, prices of iron ore have cooled but may not drop further. For instance, DR grade iron ore lumps from Odisha of Fe63% have declined to INR 5,700/t ($73/t) against INR 10,600/t ($136/t) seen three months back and Fe62% fines from Odisha have dropped to INR 3,600/t ($46/t) levels from INR 6,650/t ($85/t) three months back. Therefore, reducing prices drastically will not be viable for electric furnace mills.

Flats especially hit by stalled exports: Exports of flat steel is traditionally much higher than longs. In the 20-odd million tonnes of finished steel exported last year, flats comprised almost 13 mnt. This means the export duty levy of 15% will impact India’s flat steel exports more than long products and especially pressure mills to reduce their domestic prices in the former. They may want to offload flat products at lower prices to prevent inventory build-up.

Reduced supply from RINL: Lastly, Rashtriya Ispat Nigam Limited, a major rebar player, is still not operating one of its three furnaces due to low demand as well as coking coal-related issues. This has obviously led to some amount of supply loss in the market, a factor that would also help to keep rebar prices supported.