- Steel Composite Index dips w-o-w amid dull demand
- Mills offer mixed response as buyers struggle against inflation
- Price cuts unlikely but rebates may be an option
Morning Brief: The week ended 14 October was characterized by low demand. After a protracted period of price declines, the market had seen mills initiating a few quick price hikes for end-September and early October sales. However, the market resisted these hikes.
Mirroring that trend, the SteelMint India Steel Composite Index ended last week down by 0.5% at 152.90 points (against 153.60 points in the previous week). Longs closed at 154.40 points (155.70 points in previous week) and flats at 151.30 points (151.40 points). Importantly, the flats index dipped yet again after its freefall had been arrested five weeks back. Obviously, there was no demand to support the recent price uptrend.
Demand currently is down by almost 50% compared to the same period last year, as per some rough estimates.
Reasons for low demand
1. Inflation dampens consumer demand: The single overriding factor behind low demand is inflation amid a sliding rupee which is hovering at a record over 82 to the dollar. The September 2022 Wholesale Price Index (WPI)-based inflation dipped slightly to 10.70% against 12.41% in August. However, September saw 18 months of consecutive double-digit WPI inflation. The inflation level has also stayed over the Reserve Bank of India’s upper tolerance limit of 6% for the ninth straight month. The central bank has projected India’s inflation rate for financial year 2022-23 at 6.7%.
Inflation is having a major consumer spinoff and eventually impacting steel demand. For instance, despite the overall auto market doing reasonably well q-o-q, the two-wheeler segment threw up some surprises. Total passenger vehicles production in July-September (Q2) rose 16% in April-June (Q1). Passenger vehicle sales upped 12% q-o-q in Q2. However, data reveals that India’s largest two-wheeler player, Hero MotoCorp, reported a marginal drop in sales for September, 2022 to 5.19 lakh units compared to 5.30 lakh units in the corresponding month last year, a 2.1% dip.
Vinod Aggarwal, President, SIAM, while affirming that there is an improvement seen across segments in Q2 of 2022-23, compared to the previous year, also added that the recent increase in prices of CNG fuel, higher repo rates and the Russia-Ukraine conflict are of concern and could impact the market in the coming months.
Off-take of entry-level two-wheelers and entry-level passenger vehicles has been of concern especially as rural demand has not picked up.
2. Buyers recede post restocking: The market fell silent as buyers, especially the construction sector, receded post-restocking in end-September, early October, as soon as mills started raising prices. Construction contributes to around 60% of steel demand.
But mills are showing a mixed response. Some are not feeling the heat so much, since they are operating at a lower capacity and do not have too much inventory to offer. But one large mill is said to be under pressure despite operating at well below 90% capacity, underscoring the demand downturn.
Outlook
Demand is significantly down y-o-y and may remain so in the coming weeks, at least till Diwali is over. In any case, the festive season traditionally sees the market becoming quiet from a few days ahead.
Therefore, mills may well have to resort to discounting to bring buyers back into the market soon enough, although list prices are unlikely to fall.
The only green shoot is the production cuts expected in China for winter which are already signalling iron ore price drops but Indian mills may not be so lucky with coking coal as supply disruptions loom in Australia.
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.
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