- Q1 prices to increase, Q2 to see a drop
- Coking coal, global price movements, exports influence contracts
- Quarterly settlements to address global uncertainties
Morning Brief: Indian steel mills are on the verge of closing their first and second quarter (Q1 and Q2) contracts with automakers for flat steel, SteelMint learnt from reliable sources.
It may be recalled that in the third week of July the mills had closed the longs contracts with auto original equipment manufacturers (OEMs) for these two quarters. However, although discussions on flats had been actively on at that time, participants had steered clear of arriving at any decision.
SteelMint has learnt that now these contracts will soon close. Sources at two leading tier-I mills indicated that hot rolled coils (HRCs) will be closed at an increase of INR 6,500/t over the levels closed in H2 of financial year 2021-22 (FY22) while that for Q2 will be sealed at a price lower by INR 10,700/t from H2FY22. Thus, in HRCs, mills are taking a net decrease of INR 4,200/t over both quarters.
In cold rolled coils (CRCs), the mills are said to be arriving at a price of plus INR 4,000/t over H2FY22, and a decrease of INR 9,650/t for Q2. This would mean a net decrease of INR 5,650/t if both quarters are considered.
It may be mentioned that flats account for 80% of the steel demand in automobiles whereas longs account for 20% of the demand.
Mills and OEMs shifted gear to quarterly contracts from April 2022.The previous contracts were on a half yearly basis and the last such had covered October 2021-March 2022. These had closed with an increase of INR 3,800/t in HRCs and INR 4,000/t in CRCs over H1FY22.
Reasons for mixed trend in contracts
1. Coking coal price movements: The key reason for the Q1 contracts closing higher was the runaway inflation in coking coal right after the onset of the Russia-Ukraine war on 24 February, 2022.
Average monthly spot prices of the Australian Premium HCC (FOB) touched a record $506/tonne in May and hovered at $476/t in April. Since spot prices also influence contract prices, mills’ production costs rose on the back of steep coking coal prices. It may be recalled prices had touched an all-time high in March of an average $620/t.
However, average prices lost a sharp 35% in July to $260/t against June’s $400/t, the steepest m-o-m fall among all input prices. The drop was rooted in the fact that global steel production dropped with mills showing no appetite for spot purchases. Even heavy rains in Australia and possibilities of supply disruptions failed to spook the markets and prices remained dampened.
Thus, the contracts factored in this cost rise and fall.
2. Rise and fall in global steel prices: Steel prices rode their crest in Q1 amid supply disruptions, and panic buying by the European Union. However, as Europe stocked up, demand started ebbing. Recessionary pressures began to build up across the globe on the back of record high energy and gas prices. China’s production cuts amid demand drop and Covid surge forced mills to export at highly competitive prices. In India too, domestic and export prices rose and fell in tandem. For instance, trade-level benchmark HRC prices peaked to INR 76,000/t levels and rebar to INR 73,000/t around April.
Subsequently, global steel prices started dropping off and so did Indian domestic prices amid lacklustre home and away demand. These global dynamics have also influenced the contracts.
3. Export tax impact: The sudden imposition of the 15% export tax in May made overseas sales highly unviable. Export prices had peaked at the fag-end of March and in April, ruling at $1010/t levels FOB east coast.
When the export duty was levied, prices had already touched $100/t below their peak levels seen in April. Now, these are hovering at a little above $580/t FOB east coast, amid the tax impact and poor demand signals from Europe. Exports also influence domestic prices and, as a result, mills are on the backfoot in terms of their Q2 auto contracts.
In a recent interview to SteelMint, Alain Legrix, Director & Vice President, Sales & Marketing, AM/NS India, dwelling on the auto contracts, said: “The steel industry was severely impacted by unprecedented cost increases resulting from the Russia-Ukraine conflict, which we were trying to (partly) recover from the market. However, these contracts have now been finalized.”
Outlook
Henceforth, the auto contracts will be settled on a quarterly basis since neither buyer nor seller wants to hold long positions. Market uncertainties amid the geo-political tensions are making players nervous, driving them away from long-term settlements.
Based on OEM feedback, mills foresee good two quarters ahead. “OEMs are looking to secure their supply chain to ensure that their suppliers can follow the fluctuation of production planning,” Legrix said.
A CRISIL source indicated that automotive is expected to recover as supply chain issues resolve and grow 8-10% in FY23.
Thus, mills can possibly expect lesser bumps on the road ahead this fiscal.
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