India: Post-festive dampener persists in steel markets, imports cause jitters

• Composite steel index remains flat w-o-w
• Natural gas inflation, liquidity crunch lead to fresh output cuts
• Retails sales outlook still gloomy

Morning Brief: The market quietness extended into the fourth week. The India Steel Composite Index remained flat for the week ended 28 October. In the preceding week, it had ended down a negligible 0.6% at 151.90 points.

Longs and flats also remained flat at 153.20 points (154.40 points in previous week) and 150.70 points (151.30 points) respectively.

Factors behind flat steel index

1. Festive lull: The key reason was the festive season which saw all market participants putting a halt to almost all trading activities. Markets remained closed. User industries too observed festive holidays.

Labourers are still away from the market. Distributors and industrial buyers have confirmed they are operating with limited labour force.

2. Fresh production cuts amid natural gas price inflation: Some primary mills’ are facing production disruption amid the rising natural gas prices. India has increased the price of domestically produced gas from oilfields to a record $8.57/MMBtu on a gross calorific basis, as per a statement from the Petroleum Planning & Analysis Cell (PPAC). This is a 40% hike over $6.1/MMBtu set for April-September 2022. The PPAC has further said that the new domestic gas price ceiling for domestic gas from difficult oilfield has been set at $12.46/MMBtu against $9.92/MMBtu in April-September, 2022. Two leading mills, SteelMint heard, have been impacted considerably with one recently shutting down its sponge iron plant at its steel works in Maharashtra. Another major flat steel maker is also feeling the heat. Those bound by long-term contracts have a certain buffer but procurements from the spot market are proving to be expensive, sources informed SteelMint.

As a result, a fresh round of crude steel production cuts is being effected which is also keeping steel prices in check amid lacklustre domestic demand.

3. Liquidity crunch: There is a liquidity tightness especially among the secondary mills, which is also leading to production cuts and keeping trade activities muted, it is heard. Inflationary tendencies are forcing the central bank to hike repo rates. The RBI increased the repo rate by 50 basis points to 5.9% in September, 2022. It has raised the repo rate four times in the current fiscal in a bid to suck out liquidity from the system.

4. Construction stoppage in northern India: The Commission for Air Quality Management in National Capital Region and Adjoining areas, has restricted construction activity in the northern region of the country in a bid to stem air pollution in winter. It said all actions as envisaged under Stage III of the Graded Response Action Plan in Delhi-NCR region be “implemented in right earnest…with immediate effect.” Under this plan of action, all construction projects, including roads, except those exempted, will be strictly banned. These include earthworks, demolitions, structural constructions etc. This move is also contributing to the dull market trend.

Outlook
The short-term outlook on retail steel sales is still gloomy and mills may have to resort to rebates in November to encourage sales. Mills are better placed with end-consumers bound by long-term contracts – like automotive.

With the yen sliding to a historic 32-year low against the dollar, Japanese mills are looking at exports actively. Some small parcels of Japanese hot rolled coil (HRC) imports have recently arrived on the east coast of India. Moreover, being an FTA country, no duties involved, making the material cheaper than domestic. This development is causing some worry among mills already struggling with a dull season so far.

The India Steel Composite Index
The India Steel Composite Index is assessed on a weekly basis: every Friday at 18:30 IST, as per the weighted average prices based on manufacturing capacity and production.

SteelMint considers the Composite Index with the base year being 3 January 2020 (financial year 2019-2020) and the base value as 100. The Composite Index does not give the absolute price but a trend of the market. The Indian steel industry is broadly classified into the BF-BOF and the electric/induction furnace routes. Keeping this broad classification in view, SteelMint proposes to release the Composite Index by considering both production routes by manufacturing capacity and the production weighted method to compute the index for India. For details click to view the methodology document.