India Ratings and Research (Ind-Ra) has published its April 2021 credit news digest on India’s steel sector. The report highlights the demand-supply scenario, price trends, imports/exports in both India and China, encompassing finished steel products (both flat and long), scrap, iron ore, coking coal and others, while also evaluating at the impact of end-user industries on India’s steel sector. The agency has also covered its recent rating actions.
Rise in Production:
As per the Ministry of Steel, India’s production of crude steel increased by
19.3% month on month (mom) and 5.6% year on year (yoy) in March 2021. India’s
FY21 crude steel production was 9.8% yoy lower 97.91MT. As per World Steel
Association, China’s crude steel output in March 2021 was at 94 million tonnes
(MnT), 19.1% mom higher, though January-March 2021 production was 15.6% yoy
higher due to COVID-19 led disruptions in the previous year in addition to
higher realisations, ramp-up in domestic activities post the New Year holidays
and a strong demand in the export market. Chinese steel production could be
lower over the remaining 2021 with the country looking to reduce its steel
output to curb pollution, especially in the Tangshan province.
Consumption Strong: India’s finished steel consumption in March 2021 stood at 8.81MnT, down 3.2% mom and up 24.8% yoy. Domestic steel consumption over FY21 stood at 87.96MnT, down by only 6.3% yoy despite COVID-19, reflecting the improving end-use demand. End-use demand is likely remain strong over FY22 unless impacted by any COVID-19 led disruptions with the onset of the second wave of COVID (FY22 Steel Outlook: Growth in End-User Industries to Ensure Healthy Demand). The sustained consumption, higher net export during FY21 and the slightly lower production have led to the absorption of inventories with the steel producing companies, resulting in a closing stock of 8.9 metric tonnes (MT) of finished steel at end-March 2021 which is 5.0% mom and 35.1% yoy lower. This is one of the factors contributing towards higher domestic prices.
Low Import Risks: Indian mills were active in the export market over March 2021 due to competitive pricing. The export volumes in March 2021 were higher at 1.28MT (February 2021: 0.55MT). Domestic steel mills would continue to be active in the export market, given high export realisations and if the second wave of COVID-19 creates temporary headwinds in demand. Flat imports were minimal in March 2021 at 0.42MT (February 2021: 0.21MT) due to high steel prices in the international market. Similarly, the strong export realisations ensured long steel exports were high at 0.29MT in March 2021 (February 2021: 0.08MT). Around 50% of long steel exports are to Hong Kong. Chinese demand is likely to remain largely stable in 2021 with a steady recovery of its economy. The likely export rebate cuts to be introduced by the Chinese government is likely to insulate India from cheap Chinese exports.
Realisations Further Improved: Domestic hot rolled coil (HRC) prices (Mumbai 2.5mm-8mm, IS2062) increased by 17% mom and 66% yoy in mid-April 2021 to INR63,400/MT. Domestic flat steel prices have increased due to bullish trends in the global HRC market and strong end-use demand. The high export realisations and low risk of imports over the near term are likely to keep prices high. However, prices could face temporary headwinds due to the second wave of COVID. Similarly, domestic rebar prices were at INR53,000/MT in mid-April 2021, INR3,500/MT higher mom. International rebar prices have increased substantially with Chinese rebar prices are USD890/MT in mid-April 2021, USD145/MT mom higher.
Spreads Improved: Both HRC and rebar domestic spreads improved significantly in mid-April 2021 due to higher steel prices and lower coking coal prices. Domestic HRC spreads are as high as INR47,000/MT and increased further by INR8,361/MT mom and around 76% yoy in mid-April 2021. Domestic rebar spreads have increased to INR36,600/MT, INR2,711/MT mom and around 70.9% yoy higher in mid-April 2021. While spreads could correct over FY22 as iron ore prices gradually correct, it is still likely to be elevated.
Rising Iron Ore Prices: The elevated iron ore prices in the international market have incentivised domestic producers to increase exports. India's exports of iron ore fines/lumps increased substantially to 5.87MT in March 2021 (February 2021: 3.97MT). This is further contributing to the domestic short supply of iron ore and higher domestic prices. NMDC Ltd (‘IND AAA’/Stable) increased prices by INR600/MT mom in mid-April 2021 to INR4,810/MT. The iron ore prices are receiving support due to the high iron ore and steel prices in the international market, the likely price hike within the flat products segment, the high cost of imports and the tightness in iron ore availability, especially of higher grades. Prices are however not likely to increase much further, as the iron ore supply gradually improves further in 1HFY22.
China’s iron ore production in March 2021 was at 81.75MT (February 2021: 64.65MT) and compensated for the lower output in January-February 2021 when the production was down due to the resurgence of COVID cases and the Chinese holidays over February 2021. Production is likely to slightly improve over 1QFY22. Global iron ore prices (CNF India Fe 64%, South Africa) grew USD20/MT mom in mid-April 2021 to USD215/MT. Prices in mid-April 2021 were 105% higher yoy.
Falling Coking Coal Prices: Coking coal prices (CNF India, Australia premium HCC) were at USD110/MT in mid-April 2021, down 4% mom and 8% yoy. India continues to benefit from China’s ban on the import of Australian coal, which has caused the excess Australian coking coal supply to weigh on the prices. China’s domestic coking coal prices are significantly higher (and further contributing towards higher international steel prices) than the price at which Australian Coking Coal is imported by India and puts Indian steel producers at a cost advantage. India's coking coal imports were at 5.12MT in March 2021 (February 2021: 4.58MT), 12% higher mom and 3% lower yoy. China’s imports were at 4.91MT in March 2021 (February 2021: 3.2MT) and higher 52% mom. Around 43% imports are from Mongolia, 24% from Canada and 12% from Russia. Chinese coking coal imports have also been lower in recent months due to the winter season, resurgence of fresh COVID-19 cases in Hubei province and the Chinese New year Holidays.
Strong India Pellet Prices: Domestic pellet prices (Ex-Raipur ;6-20mm, Fe 63%) were at INR14,100MT in mid-April 2021, up 16% mom and 141% higher yoy. The continuance of strong prices shall benefit pellet producers who would earn healthy margins over 1QFY22, especially those who are backward integrated with iron ore mines. International pellet price were at USD196/MT in mid-April 2021, up 8% mom but up 111% yoy. Domestic steel players are still taking the advantage of the strong price levels in the international market and increased pellet exports. While Indian pellet export shipments have gradually reduced from the highs of May 2020 when exports were at 2.01MT, it was still high at 1.44MT in March 2021 (February 2021: 0.79MT).
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