Indian primary mills cash in on infra construction’s fiscal-end rush

• Primary mills raise project-level prices in mid-March on seasonal demand
• However, trade level slightly saddled with inventory on subdued sales
• Secondary mills lower offers to lure back buyers
• Project segment prices dip but may not see further fall from here

Morning Brief: Why did the project segment scenario change so sharply from mid-March, prior to which demand was sluggish, on the back of inflationary pressures? Did offtake for BF-grade material spiral up from mid-March, pulling up prices in the process? But trade sources said they were on the backfoot as demand remained a tad subdued.

It may be mentioned that trade level blast furnace route rebar prices, exy-Mumbai, recently climbed to INR 74,000/t, a record INR 12,000/t higher against the induction furnace route’s INR 62,000/t.

But, more importantly, prices primary mills offered to the infrastructure segment were an even steeper INR 76,000/t in March and early April although, unofficially, these have now dipped to INR 73,500-74,500/t.

In April so far, secondary trade-level rebar prices averaged INR 66,000/t against BF’s INR 73,500/t, recording a spread of almost INR 8,000/t.

Factors that propped project level BF-route rebar prices

Project developers go directly to mills to discuss better prices, cutting out dealer margins. Moreover, projects buy in bulk and thus can negotiate preferential pricing.

• Project demand supported prices: Demand from the infrastructure segment is usually strong in the last quarter of FY2021-22. But this year buying had turned sluggish on the back of inflationary pressures. However, demand spurted from the second half of March, as projects approached closures. As a result, all stocks were swept clean, informed a primary mill source. Mills ran short of inventory especially in the last week of March and will now take at least 15 days to replenish their yards with no pressure to sell, at least for the next 8-10 days. Thus, landed prices climbed in March to INR 75,000-76,000/t and the trend sustained into April.

Domestic demand kept mills so busy that, as per an official at a primary mill, they will resume export bookings now, but after prioritizing domestic demand.

• Seasonal price escalation: It is not surprising that project-level prices were higher than trade segment’s in Q4, because this trend is invariably replicated at the end of a fiscal. Prices of infrastructure steel increase in the last quarter of every financial year, because demand increases as projects near deadlines. This is vice versa in a slack season like the monsoons. However, this trend moved in late this calendar.

No pressure of losing project customers: There is no pressure on primary mills that projects would opt for IF-grade material since clauses are often woven into tender document on sourcing branded materials.

Secondly, target segments are different for both, informed a construction source. IF-route rebar is used by the unorganized construction segment, especially housing. Sources said, if IF-grade prices rise, buyers recede till a correction happens, unlike large project developers, bound by contracts and labour issues.

Thirdly, the IF process is different and so the quality question always arises. While the government has directed that secondary sector materials that meet BIS-certified norms can be procured for infrastructure, most developers prefer to buy from primary mills which are backed by a certain brand equity.

• Inventory pile-up at trade level: The trade segment is selling at around INR 3,000/t lower than mills because of the slight inventory pile-up at their end. It may be mentioned that project segment demand in particular is high where procuring happens from mills directly. Thus, trader are slightly saddled and selling lower to liquidate inventory, generate cash and resume the business cycle.

“Inventory is there at the trade level and that is why trade segment prices are lower,” corroborated a source.

• High coking coal prices: Primary mills had bought coking coal at higher contract prices, which they are still holding on to and attempting to recover these costs. It may be recalled, spot coking coal prices, which determine contractual rates, were up a substantial 32% m-o-m in March.
• Negotiations can lower prices: A source at a leading infrastructure building company said, actual offers are invariably negotiated lower by INR 1,500-2,000/t although prior offers floated can be higher. “When we sit for final negotiations with the actual LC and advance payment in hand, we renegotiate a lower price unless the market is extremely volatile,” confided the source.

Thus, spot purchases prices have already dropped to INR 73,500/t while credit offers are at INR 74,500/t, informed a leading project source.

Way ahead?

Secondary prices will not increase from here because of the pressure to sell. Prices had climbed to over INR 70,000/t last month, with buyers scurrying to the sidelines although latent demand simmered underneath. To entice them back, sustaining prices at current INR 61,000-62,000/t levels is imperative. IF mills anticipate sales will pick up post-Ram Navami and Easter.

If thermal coal prices increase from current levels, there may be a compulsion to raise offers but otherwise, not. “Considering the present sales scenario, secondary mills will not raise prices from their current levels in the short term,” affirmed a source.

Primary mills, on the other hand, had increased their project prices to INR 75,000-76,000/t and even though these have dipped, they are comfortably placed with enough domestic demand, and no inventory pile-up. Prices are not likely to drop from present levels in the short term as domestic orders will remain high up to mid-June. Any further hikes from here will depend on raw material prices and the exports scenario.