Bullish global market fuels surge in domestic steel prices

The continuing surge in global steel demand, high iron ore prices in the domestic market and production cuts at mills owing to diversion of liquid oxygen supply for medical purposes, together are fueling the surge in domestic steel prices.

The prices are likely to remain elevated on the back of the following factors:

1.Strong global demand:
SteelMint’s Indian HRC (SAE 1006) export index stands at $1,038/t FoB east-coast , up by $68/t week-on-week (w-o-w) against $970/t FoB . Indian mills have also sharply raised HRC export offers to $1,070-1,080/t cfr for Vietnam. Removal of the export rebate tax on HRCs by the Chinese government has boosted export offers from China. This, in turn, has resulted in a sharp hike in HRC export offers from India as well.

2.Increasing iron ore prices in domestic market:
Odisha's state-owned miner, Odisha Mining Corporation (OMC), had scheduled an iron ore e-auction on 10 May'21 for 1.37 millon tonnes (mn t) of iron ore fines. The entire quantity put up for auction was booked with bids increasing by up to INR 2,750/t (over 50%) against the set base price. The miner had increased the base price by up to INR 1,880/t against the last e-auction held on 10 Mar'21. Few trade sources highlighted that bids fetched were higher than expected on active buying.

3.Production cuts at steel mills:
Indian steel mills have started diverting liquid oxygen for medical purposes from their plants to hospitals across the country. Thus, steel production will be negatively impacted at least in the short run leading to supply crunch. Recently, JSW Steel reported a capacity utilisation of 91%, down 5% in Apr’21 as compared to 96% in Mar’21. The company’s crude steel production for Apr ’21 was at 1.37 mn t, down 5% month-on-month (m-o-m). The output of flat-rolled products declined by 9% to 0.96 mn t and long steel production fell by 5% m-o-m in Apr’21. However, demand, particularly in overseas markets, is strong which is likely to push up the prices .

On the other hand, SteelMint's benchmark prices for 2.5mm thickness hot-rolled coils (HRC) stand at INR 66,000-67,000/t (exy-Mumbai). The prices mentioned do not include GST @18%.

End-user industry compelled to increase prices:

• Auto companies: Many companies are mulling a further increase in their prices in spite of having increased prices in recent months as a part of a business strategy to offset rising input costs. For instance, Mahindra & Mahindra (M&M) in May’21 announced a price hike of 1.8% -3%, M&M Chief Executive (Automotive Division) Veejay Nakra revealed. In mid-April, M&M had hiked steel prices . However, if we were to look at the demand side, the overall scenario isn’t very encouraging owing to lockdowns in various states.
  
  
• Steel pipes and tubes: The country's leading branded structural steel tubes manufacturer, APL Apollo Tubes Limited, increased pipes price by INR 2,500/t to INR 69,000/t($939/t) FoR Chhattisgarh, effective 11 May ’21. This is the second hike by the company for May '21 sales. Although, looking at the demand front, the second wave came as a shock for the housing sector. According to reports, homebuyers have become cautious in view of the Covid situation and are now retreating from buying houses to reduce spending.
  
  

Outlook:
As steel prices are likely to remain firm amid a demand surge in the global markets, Indian steel companies are expected to accelerate the pace of debt reduction in the coming quarters. For instance, JSPL on 10 May’21 announced that it has made a prepayment of INR 2,462 crore to its term lenders. This is in continuation of its long stated financial strategy of debt reduction and building a robust balance sheet with optimum capital mix. More than INR 20,000 crore of debt have been reduced from peak levels till Dec'20.