India Ratings and Research (Ind-Ra) has published its November 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 the impact of end-user industries on India’s steel sector. The agency has also covered its recent rating actions.
Global Production to
Fall in 2H21: Ind-Ra expects the Chinese crude
steel output to be weaker in 2H21 than in 1H21 on account of the strict
government measures to curb production. The global crude steel production was
at 145.7 million tonnes (MnT) in October 2021, 1% month on month (mom) higher but
10.6% year on year (yoy) lower. The lower crude steel production levels yoy
can mainly be attributed to China, which recorded a lower steel output of
71.6MnT in October 2021 (September 2021: 73.8MnT; October 2020: 93.35MnT). The
lower Chinese production levels can be attributed to the production curbs and
the export rebate cuts implemented in May 2021 to reduce export allocations.
As an additional measure, the Chinese government is considering to introduce
export duties on steel products, although an official announcement is awaited.
The global crude steel production over January-October 2021 was 1,607.1MnT, up
5.9% yoy due to strong Chinese production. India’s crude steel production
improved 2.4% yoy and 2.5% mom to 9.8MnT in October 2021.
Ind-Ra opines India’s steel production growth in 2HFY22 will be supported by strong consumption growth and preparedness of the sector participants with new capacities. During January-October 2021, India’s steel output was at 96.9MnT, up 20.6% yoy, due to higher export volumes and increased capacity utilisations. India’s crude steel production improved 2.4% yoy and 2.5% mom at 9.8MnT in October 2021.
Consumption to Improve in 2HFY21: India’s finished steel consumption was 1.1% yoy lower but 8.2% mom higher at 8.19MnT in October 2021. India’s steel consumption rose significantly in 7MFY22 to 53.53MnT from 42.14MnT in 7MFY21. An increase in government investments including schemes such as ‘Make in India’ and expedition of government projects have provided significant growth momentum to construction and infra sectors. The infrastructure, construction, auto, real estate & pipes sectors together account for around 65% of the domestic demand. Domestic finished steel consumption in 3QFY22 is likely to be sequentially higher with the monsoon season being over and improving vaccination rates.
Imports & Exports to be Low: India’s flat steel exports reduced over September-October 2021. In October 2021, flat steel exports were 26% mom lower but 53% yoy higher at 0.81MnT. The lower export levels can be attributed to Vietnamese buyers sourcing hot rolled coil (HRC) domestically, inactivity in the UAE market, limited inquiries from Nepal and a decline in global HRC prices. This is likely to keep the export market subdued over the near term. Other contributors to the reduced export level is the improving domestic demand and increased freight rates and logistical overheads on exports. Due to a further fall in international HRC prices, there is a reduction in the discount of domestic prices to import prices. This is likely to put pressure on domestic steel prices. While import offers are attractive, domestic end-use customers are holding import orders in anticipation of a reduction in domestic steel prices. The suspension of countervailing and anti-dumping duties could increase the credit risks for the sector due to pricing pressure. Over the near term, the increased freight rates and logistical disruptions on account of container unavailability and longer storage at ports due to COVID-19 measures will continue to pose challenges to exports.
Domestic HRC prices were at INR71,000/MT in mid-November 2021, up 1% mom and 47% yoy. While prices are at a high point, they are likely to face pressure from a continual decline in global HRC prices due to a sluggish Chinese demand and declining raw material prices. Furthermore, the prices are largely unviable for end-use industries and customers are awaiting a price decline. Global HRC prices are at USD780/MT, 20% mom lower and 32% yoy higher. Domestic rebar prices were at INR61,000/MT in mid-November 2021, INR1,000/MT mom higher and at a 10-year high. The increased price levels are due to the coal crisis with 60%-65% of domestic rebar production being through the induction furnace route (predominantly sponge iron based). However, the prices could face some pressure from falling international prices. International rebar prices sharply corrected to USD780/MT in mid-November 2021, 20.4% mom lower but 37.3% yoy higher. The fall in international rebar prices can be attributed to a slowdown in the real estate and infra sectors in China with limited exports.
Spreads Correct in 2HFY22Both flat and long product domestic spreads (realisation/MT minus cost/MT) corrected in mid-November 2021 as anticipated with the steel mills consuming the high-cost coking coal inventory. The spreads could face further pressure in case of any correction in the steel prices. Domestic HRC spreads reduced as anticipated to around INR40,300/MT, 14.1% mom lower in mid-November 2021 while domestic rebar spreads reduced by around INR6,300/MT mom to around INR30,300/MT in mid-November 2021.
NMDC IND AAA’/Stable maintained prices mom (0-10mm, Fe 64%, exclude royalty, District Mineral Fund, National Mineral Exploration Trust, cess, forest permit fee, and other taxes) at INR4,760/MT in mid-November 2021, although they were still 51% yoy higher. Prices are likely to be under pressure in 2HFY22 as iron ore supply gradually improves, although unlikely to correct to 2020 levels due to a structural pricing change with the auction premiums. India's exports of iron ore fines/lumps remained low at 0.33MnT in October 2021 (September 2021: 0.27MnT), 22% higher mom and 91% lower yoy and significantly lower than the highs of May 2021. The lower exports can be attributed to the subdued Chinese demand on steel production cuts as well as fall in realisations in the export market. Furthermore, the domestic steel production has been steady and is likely to improve in coming months. Accordingly, India’s iron ore exports are likely to be lower over 2H21.
Coking coal prices (CNF India, Australia premium HCC) was USD318/MT, down 20% mom but 212% higher yoy in mid-November 2021. The correction in prices can be attributed to the limited buying interest from Asian countries ex-China. Furthermore, China’s increased domestic coal production and the softening coal and steel demand have helped reduce the prices partially. However, the prices remain highly elevated. India's coking coal imports were at 4.34MnT in October 2021 (September 2021: 4.26MnT), up 2% mom but 16% lower yoy. While steel production has been steady, domestic steel mills have postponed procurements to the extent possible due to the higher coking coal prices. However, lower inventories will force steel players to import higher volumes. China’s imports remained on par at 4.38MnT in October 2021, up 1% mom but 26% lower yoy. A key trend being seen is the preference of Indian blast furnace producers for better grades of coking coal to maximise the production yield, considering that freight costs are the same, irrespective of the grade amid container shortages and higher freight costs.
Domestic pellet prices (Ex-Raipur; 6-20mm, Fe 63%) were 21% mom and 6% yoy lower at INR10,900MT in mid-November 2021. The prices remain elevated and the high realisations have benefited pellet producers, especially those who are backward integrated with iron ore mines, to earn healthy margins. International pellet price was 16% mom and 11% yoy lower at USD126/MT in mid-November 2021. With China’s crude steel production lower in 2H21, its requirement for lower grades of iron ore and pellets has reduced and has contributed to the fall in prices from the highs of 1H21. China is likely to focus on higher grades or pellets, which could gradually support India’s pellets exports from 2H21, subject to logistical disruptions. The Indian pellet export shipments reduced mom to 0.24MnT in October 2021 (September 2021: 0.47MnT) and are significantly lower than the high levels over March-July 2021 when exports were above 1MnT each month.
Source: Ind-Ra, Steelmint, Joint Plant Committee, World Steel Association, Ministry of Steel
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