The current HRC-rebar spread has shrunk to around INR 10,000/tonne (t) ($135/t). If set against the backdrop of the last five months, this had widened to a record INR 16,000/t ($216/t) in Jun’21, but then steadily narrowed to around INR 13,000/t ($176/t) in October, dropping even further so far in November.
The monthly average trade level price for the BF-route rebar is INR 57,600/t ($778/t) against HRC’s INR 70,700/t ($955/t), as per SteelMint’s data.
The spread had hit a record high on the back of sky-rocketing coal prices.
Factors that may keep the gap narrowed
- Coal pressure eases: Induction furnace (IF) mills, especially sponge, are highly dependent on thermal coal. With domestic supply tight, they had to resort to imports at astronomical rates, which pushed up their cost of production. And, eventually, the price of the end-product, rebar. Since IFs enjoy almost a whopping 70% of the domestic market, their rebar price movements influence BF-grade too. A hike in IF-grade gives primary mills the leeway to raise their prices.
However, coal prices have cooled a bit. For instance, India’s portside thermal coal prices, which earlier traded at INR 7,000-8,000/t ($95-108, are currently at INR 13,000/t ($176/t), after touching a peak of INR 18,000/t ($243/t). Also, with supplies from Coal India improving, IFs have room to reduce rates. As per SteelMint’s latest data, the Fe500 IF-grade rebar offers fell by INR 100-1,000/t ($1.35-13.5/t) in the local markets. But, still, coal is trading at double its previous levels and this may not allow IFs to reduce prices from here. - Primary mills’ cost pressure: Primary mills’ cost of production is still high. Since their coking coal contracts are inked quarterly, the cost impact will remain at $200-250/t in the short-to-mid-terms. Australian premium low vol HCC has touched INR 23,500/t levels since Jan’21. At the steel level, this translates into a cost impact of INR 18,000-19,000/t ($243-257/t).
- RINL factor: With this PSU major undergoing crude steel and hot metal production loss due to a technical glitch in one of its three blast furnaces, there could be a drop in billets and rebar supply in November, which would support current prices levels.
- HRC on backfoot: A month back, HRC prices were trading at higher levels, margins were good and mills had expectations of good demand. But, now HRC is on the backfoot, dragged down by negative export sentiments. There have been nil export bookings in the past one month. Export prices globally are dropping. For instance, Chinese imported HRC offers into Vietnam crashed to $765/t levels, CFR. That apart, globally domestic prices are softening. China’s prices fell by more than RMB 300/t ($47/t) last week.
These factors will not allow mills to raise HRC prices in the short term.
Outlook
Longs prices thus do not have scope to drop from here. At best, they will remain firm if not rise as coal is expected to stay high till year-end.
Domestic HRC prices, on the other hand, may get rolled over or stay firm on bearish flat steel outlook.
Sentiments emerging from market mover China are low where prices fell by more than RMB 300/tonne (t) ($47/t) last week. The Shanghai Futures Exchange HRC-rebar spread has narrowed with the former falling and latter rising, due to coal scarcity and power issues. Currently, rebar is at RMB 4257/t ($666/t) against HRC’s 4,502/t ($704/t).
This trend may get replicated in India.
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