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Steelmakers to face double whammy of high cost, low prices in 2HFY22E

India’s infrastructure sector may soon get some relief with the expectation of a 5-8 per cent correction in domestic steel prices, amidst weak local demand.

Steelmakers to face double whammy of high cost, low prices in 2HFY22E
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Steelmakers to face double whammy of high cost, low prices in 2HFY22E 

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India's infrastructure sector may soon get some relief with the expectation of a 5-8 per cent correction in domestic steel prices, amidst weak local demand. The correction, according to steel sector analysts, would mean that steel prices may fall by a sharp Rs 5000- Rs 6000 per tonne bringing the benchmark hot rolled coil (HRC) prices close to Rs 65,000-Rs 66,000 per tonne mark from current levels of around Rs 72,000 per tonne. There is no doubt that the prices of steel in India are already lower globally than the landed costs in India, and some analysts are of the view that the same may not decline further in the near future.

Interestingly, over the past couple of months, steel prices have already corrected by around 10 per cent from their peaks. However, higher raw material costs and general inflation are affecting the margins of industry players. Apart from user industry issues on supply chain debottlenecks, raw material prices may spring up again owing to the fresh Covid wave and increased Chinese consumption. The steel companies, therefore, continue to remain optimistic about prices, going forward, given no new capacities are expected in the short term.

The expected cut in prices by steel companies in January will come on the back of HRC prices falling between Rs 2,500 and Rs 3000 per tonne or 4 per cent in December. The cut will be a big relief as industries in small and medium sectors and other infrastructure players were seeing their margins shrink amid rising metal prices since late last year.

It is pertinent to mention here that steel prices are mainly a function of the prices of core raw materials such as iron ore and coal, coupled with the transportation costs. Significantly, during the last year, raw material costs had been blowing hot and cold. With the substantial decline in iron ore prices during the last few months, post their two-fold rise and moderate demand on account of lower consumption by China, steel prices saw a softening trend. However, iron ore prices again surged in December 2021, fuelled by China pledging to focus on economic stability in 2022, thereby improving their demand outlook. The supply of iron ore is not expected to improve substantially in the short run, particularly during the fresh covid wave, and iron ore prices may remain buoyant. Chinese HRC steel prices remained range-bound within $770-790 per tonne after correcting 20 per cent in November 2021 and are at early CY2021 levels. Stringent production curbs during 2HCY21 in China have offset demand weakness and kept steel inventory low. Steel prices in the US and Europe continue to soften with another 5 per cent-10 per cent correction in December 2021.

Sector analysts feel that improved sentiments in China have led to a sharp recovery in iron ore and stabilized coking coal prices. Indian steel margins in 2HFY22E face a double whammy of declining steel prices and elevated costs.

Going by a recent Brickwork Ratings study, there have been some delays in terms of demand from user industries. The construction sector was seeing issues due to right of way, automobile production was affected due to the non-availability of chips and other general engineering was moving slowly. The large manufacturers had also cut down on production on account of uncertainties. Interestingly, steel consumption is expected to be strong in Q4FY22 on account of government expenditure on the infrastructure budget, during the remaining period of this fiscal, as planned.

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