India: Steel, input prices spurt but China’s Covid wave may break rally

• Coal prices show highest rise in last fortnight
• HRC prices get propped up by EU demand
• Billets see uptrend as CIS offers remain absent
• Rise in global steel prices support Indian mills’ higher export and domestic offers
• Domestic silico manganese buyers in panic mode as export enquiries increase
• Will China’s Covid outbreak dampen prices?

Morning Brief: Prices of steel and most of its raw materials in India have shown a sharp double digit increase since the onset of the Russia-Ukraine war on 24 Feb’22, and tracked by SteelMint till 11 Mar’22. Markets served by Russia and Ukraine in terms of coal, semis, scrap and metallics and finished steel are hungry for supplies and diverting attention to other geographies. Freights have zoomed amid high crude and bunker prices and changed trade flows.

Coals

A direct offshoot of the geo-political conflict is the runaway coal inflation. Indeed, the highest rate of increase has been seen in energy commodities. Russia exports 153 mnt of thermal coal and 32 mnt of coking coal, the major portion of which goes to EU, and these volumes have been disrupted against the backdrop of western sanctions on the warring country. Russia supplies around 30% of EU, Japan and South Korea’s coking coal demand.

As a result, demand for Australian coking coal from ex-China markets has zoomed.

The Gangavaram portside prices of the 5000 NAR RB2 grade imported from South Africa have shown the steepest incline, by 48%, to INR 24,500/t as on 11 Mar’22 against INR 16,500/t seen on 24 Feb’22. Limited availability due to logistics issues have heated up prices, forcing buyers, especially sponge iron units, to the sidelines. Although the war is leading to demand from other countries served by Russia, South Africa is just unable to supply enough.

Close on its heels comes the Australian low-vol HCC coking coal, up a sharp 47% to $530/t within the fortnight under review.

The G9 grade at South Eastern Coalfield’s auction showed the third highest increase of 30% to INR 6,639/t (INR 5,118/t). CIL is offering less due to diversion to the domestic power sector that is showing inventory depletion as the scorching summer approaches.

Steel

Indian mills’ hot rolled coils (HRCs) exported to Europe followed next. Prices rose in the period under review by 44% to $1,250/t against $870/t. Benchmark domestic trade-level prices, ex-Mumbai, rose 13% to INR 74,400/t (INR 66,000/t).

The northward trajectory of raw material prices is giving the main push to domestic and overseas finished steel prices.

That apart, global prices of HRCs had been scaling up thanks to global tensions. In flat products, Russia exports 9 mnt of slabs of which 50% goes to the EU and Turkey. Ukraine exports 3 mnt of slabs, mostly to EU and Turkey. So, overall, supply of over 7 mnt of slabs to EU and Turkey are disrupted currently. In flat products, Russia and Ukraine export 9 mnt to Turkey and EU per year.

As a result, EU is scouting for HRC and other flat materials, sending prices up. Obviously, such raised prices offer meatier margins. Current Indian offers to Europe have shot up to $1,250/t CFR Europe from the levels of $1,140-1,150/t CFR heard at the beginning of the week.

However, China is facing its worst Covid outbreak since Wuhan in Dec’19, which has dragged down SHFE rebar futures contracts for May on 14 Mar’22 to RMB 4,695/t ($738/t), a drop of RMB 222/t ($35/t) against the closing on 11 Mar’22.

Meanwhile, other steel items showed an increase ranging from 13-24%. For instance, wracked by thermal coal prices, the induction furnace route rebars, tracked daily, were up 24% to INR 72,000/t (INR 57,900/t) while the blast furnace route rebar, ex-Mumbai, singed by coking coal, climbed 15% to INR 72,500/t (INR 63,000/t). BF-route rebars are traditionally priced higher. However, the conflict has upset the matrix with the IF-route nudging very close to the BF product. Wire rods too were up 23% to INR 65,000 (INR 52,700/t).

Scrap and metallics

Russia’s scrap and metallic exports amount to 12 mnt per annum with the highest share going to EU and Turkey. In scrap, prices of HMS (80:20) of Dubai origin, showed a sharp 22% increase to $612/t CFR India ($500/t) while US-origin gained a sharper 28% to $650/t CFR Turkey ($507/t) as both EU and Turkey turn to other sourcing countries.

Mandi scrap (end-cutting, structures, rebar etc) have gained 17% in the period under the scanner to INR 53,000/t (INR 45,400/t) as freights surge.

Pellet-based DRI, ex-Raipur, prices rose 20% to INR 43,000/t (INR 35,700/t) whereas steel-grade pig iron, ex-Durgapur, surged 27% in 15 days to INR 60,500/t (INR 47,600/t), all pushed up by scorching thermal coal prices.

Billets

In billets, the bi-weekly BF route index price rose 17% to $760/t FOB ($650/t, FOB) whereas the domestic IF route ex-Raipur index spurted 20% to INR 59,500/t (49,500/t).

A key reason for rising billet prices is the vacuum created by the Russia-Ukraine conflict whereby there are no offers from the usually prolific CIS countries. Russia exports about 30 mnt of steel out of which 50% comprise semi, billets and slabs. Ukraine produces 21 mnt of steel of which it exports 15 mnt. Out of this, 6 mnt comprise billets. Overall, 21 mnt of exports of semis are at stake which will definitely create disruptions.

As a result, global billet prices are headed north. South East Asian offers rose $28/t w-o-w while Iran’s billet export prices have edged up $65-70/t w-o-w.

Raw materials cost push is inflating billet prices globally.

Iron ore

Despite China’s production cuts, relatively bullish market sentiments kept Australian fines (Fe62%) buoyed at around $150-160/t but Covid can act as a damper. Domestic prices are firm, influenced by rising finished steel prices. The bi-weekly ex-Raipur pellet index was up 12% to INR 14,200/t (INR 12,650/t) although the Odisha fines index (tracking 63% Fe content) rose a more modest 8% to INR 7,100/t (INR 6,550/t) and lumps by a marginal 4% to INR 10,800/t (INR 10,400/t).

Ferro alloys

Silico manganese prices have been impacted by the geo-political conflict too. Russia exported over 88,000 tonnes of the material in 2021. Domestic buyers pressed the panic button, looking to procure in volumes before prices rose further as export enquiries spurted.

Prices, ex-Raipur spiked 33% in the last fortnight to INR 126,000/t (INR 94,700/t).

Outlook

Will steel and raw material prices remain elevated in the short to medium term till trade flows resume normalcy? This prospect is not visible in the near term against the backdrop of persisting geo-political tensions.

On the other hand, market mover China’s Covid outbreak can impact prices. SHFE futures contracts have already fallen. How long will the bear slink around is difficult to predict at this juncture.