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Domestic mills hike prices to close the gap with imports

Margin outlook strong, but further hikes unlikely

As was expected, Indian mills have raised flat steel prices in Jun’21 to close the gap with regional prices, which had rallied sharply in the first fortnight of May’21. Prices have been raised by ~INR3,000/t for HRC and ~INR5,000/t for CRC. Average HRC prices for 1QFY22 are ~INR11,000/t (20%) higher QoQ, which implies another record EBITDA quarter for flat steel producers. Domestic HRC, now at INR70,000/t (USD960/t), is still at a discount of ~10% to import parity prices. However, this might be the last of the hikes in India as China’s domestic and export prices have corrected sharply in the last fortnight, posing a risk to regional prices.

Price hikes to further boost margins for steel companies

* Price hikes continue: With domestic steel supplies remaining tight due to higher export bookings and domestic steel prices trading at a sharp discount to import parity, domestic steel mills have hiked flat prices by INR3,000-5,000/t in Jun’21 to INR70,000/t for HRC and INR87,000/t for CRC. As a result, HRC prices are now higher by ~INR14,000/t over Mar’21 exit prices. Average HRC prices for 1QFY22 are higher by ~INR11,000/t (20%) over 4QFY21, which would result in higher margins for flat steel producers.

* Spreads improve further despite a rise in coking coal: Despite the recent surge in coking coal prices to USD177/t CFR India (up 32% MoM), spot HRC spreads are ~INR8,500/t higher than 4QFY21. With rebar prices not being hiked, spreads for the same are ~INR4,000/t lower than 4QFY21. Spot steel spreads for HRC/rebar stand at INR45,200/INR30,700 per tonne.

* Further price hikes unlikely: Domestic HRC, now at INR70,000/t (USD960/t), is still at a discount of ~10% to import parity. We believe this might be the last of the hikes in India as China’s domestic and export prices have corrected sharply in the last fortnight, posing a risk to regional prices.

China export offers decline; pose a risk to regional offers

* China’s domestic steel prices remained volatile in the last fortnight as authorities there took measures to curb speculation in prices. Currently, China spot HRC prices are trading at USD867/t, down 17% from recent peaks (though up 2% WoW).

* In line with our expectation highlighted in our note earlier, China HRC export prices have declined 5% WoW (11% in the last two weeks) to USD945/t.

* With export prices still remaining at a premium of ~9% to domestic HRC prices (USD867/t), there remains further downside risk to export prices as they have historically traded at a premium of ~4% to domestic prices.

* Korea/Japan traders remained inactive in recent trades due to lower offers from China. Korea/Japan offers are currently priced at USD1,055/t, a premium of ~12% to China’s export offer prices, which we believe are unsustainable.

* We expect weakness in China prices to also percolate down to regional prices in coming weeks.

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