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Steel: Domestic prices fall; export prices rise

HRC prices in traders’ market during the week ended 15th Dec’22 were down by a further Rs350/te WoW on an average. However, rebar in both primary and secondary markets rose slightly owing to gradual pick-up in infrastructure demand. Regional prices however rose by US$10-15/te on price hikes taken by the major players on optimism around demand pick-up in China post relaxation of covid-related restrictions. As a consequence, India HRC export prices also rose by US$25/te WoW.

Going ahead, we expect domestic flat steel players to be at a disadvantage compared to longs players owing to unfavourable price parity with imports, lean domestic demand and export prices continuing to stay at discount with respect to domestic realisation. We maintain our cautious view on the ferrous space with longs players – JSPL (TP: Rs605) and Shyam Metalics (TP: Rs425) – as our key picks. We are also positive on APL Apollo (TP: Rs1,225) as, being a downstream player, it is relatively insulated from adverse price movements.

* HRC prices continue to slide: HRC prices in the traders’ market declined by an average of Rs350/te to Rs54,180/te, lowest since Mar’21. Rebar prices, in both primary and secondary markets, rose slightly by Rs670/t and Rs150/t respectively on pick-up in infrastructure demand. That said, our channel checks suggest production restraint by primary steel players in Nov’22 due to lingering weakness in domestic demand, particularly in the flats segment. As a result, domestic mills are eyeing export markets post removal of export duty. As per SteelMint data, domestic players have booked about 50-60kte for exports to EU besides Vietnam and Turkey for shipment in end-Dec’22 or early-Jan’23. Export realisation is up 8% MoM at US$560/te – mainly tracking similar uptick in regional prices. However, even at the current price levels, export margin is likely to be significantly lower as export prices are still at a discount of 15% compared to domestic prices. On the imports front, we see challenges looming with 80-90kte of steel cargoes booked for end-Dec’22/earlyJan’23 delivery (as per SteelMint). We view this as a challenge as prices in traders’ market are at Rs54,100/te compared to imports (from the Far East) at Rs49,000/te. As a result, domestic prices can remain muted in the near term.

* Regional prices rise further: Regional prices have risen further during the week following hikes by regional players: 1) Boasteel has announced an increase of CNY200/te (US$29/te) for HRC and CY50/te (US$7/te) for Jan’23 shipments; 2) Formosa (Vietnam) has increased HRC prices by US$55/te for Feb’23 sales; 3) Shangang Steel has raised rebar prices by CNY100/te (US$14/te). The price increase by regional players is largely on the optimism around easing of covid-related restrictions in China, European importers coming back to the market for restocking in Jan’23 and cost-push from higher iron ore prices (pursuant to Vale reducing its production guidance). Furthermore, we believe coking coal prices might also stay elevated in Q1CY23 owing to possible (seasonal) weather-related disruptions in Australia, which are likely to impact logistics.

* Outlook: Longs continue to have an edge over flats: In our view, flats appear to be more susceptible than longs owing to weak domestic demand and persistent threat of imports. On regional front, we believe the resurgence of covid cases in China might undermine the easing of restrictions. We believe the substantial gap between domestic prices and landed cost of imports might keep flats prices under pressure. We maintain our cautious view on the ferrous space with JSPL (TP: Rs605) and Shyam Metalics (TP: Rs425) as our key picks owing to their long-heavy product portfolios.

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