Domestic steel sector expected to witness healthy traction due to supply chain alteration

The steel sector in India is expected to see healthy traction owing to supply chain alteration. Consequently, domestic steel prices may see a slight increase in the near term and is expected to soften only a minimal two-four per cent on-year (for flat steel) in fiscal 2024 after seeing a decline of over 30 per cent last December from the historical highs of April, as per a recent report by CRISIL.

Steel prices had climbed 25 per cent in just two months at the onset of the conflict between Russia and Ukraine, but cooled off due to a drop in raw material prices, imposition of export duty by the government of India, and rising stock levels.

The CRISIL report highlights that as export curbs ease, rising input costs, gradual demand revival come into play. The report points out that the global steel prices are set to stabilise in the CY (calendar year) 2023 on-year, after falling over 40 per cent to $570 to $590 per tonne in December 2022 from the early-April peaks of $1,000 per tonne on tepid steel demand. The report also points out that the domestic steel prices are once again set to turn the corner as steel producers face rising input costs.

A large part of this is because the Indian steel industry imports 90 per cent of its coking coal requirement, majorly from Australia.

The report highlights that while coking coal prices were on a declining trend for the majority of this fiscal, short-term volatility was observed in anticipation of supply chain disruptions. Easing of China’s unofficial ban on Australian-origin coal import will not only add to further volatility but also alter the supply chain, yet again. While there are reports that three power plants and a steel player in China have already been given the go-ahead to purchase Australian coal, more entities are likely to be allowed.

That said, since China’s unofficial ban, Australian miners and traders have redirected supplies to other Asian and South American destinations. China, on its part, has come to rely on Russian and Mongolian coking coal supplies. These reasons, along with flattish demand growth in China, despite its government’s real estate push, will prevent a major rally in Australian coking coal prices in 2023.

“Anticipation of China-Australia coal trade resumption had already driven coking coal prices beyond $300 per tonne by late December. But with the Chinese new year nearing, uptick in trade volumes between Australia and China is expected only beyond March 2023. However, any major imports by China is anyways unlikely, given Chinese steel mills have already adjusted to Russian and Mongolian coal over the past two years, which comes at a healthy discount to landed Australian coal. With coal production in Australia unlikely to see any sharp increases due to environmental concerns, coking coal prices are set to stay elevated in 2023 around the $250-300 mark,” remarked Hetal Gandhi, director-research, CRISIL Market Intelligence and Analytics.

The CRISIL report highlights that along with coking coal, domestic iron ore prices have also steadily risen since the withdrawal of export duty effective November 2022. Since then, the National Mineral Development Corporation has raised iron ore fines prices by over 30 per cent. It is expected that prices are only set to move up further, with expected healthy domestic demand in a pre-election year and improving global iron ore prices which also rose 20 per cent over the past two months. Rising input costs has led integrated and secondary players to announce price hikes across segments over the last two weeks, by Rs 2,000-2,500 per tonne.

Experts at CRISIL point out that the projected demand growth at a compound annual growth rate (CAGR) of eight-nine percent between fiscals 2023 and 2024, along with elevated coking coal prices, will keep flat steel prices propped up at Rs 60,000 per tonne in fiscal 2024. Although this represents a marginal dip of 2-4 per cent over fiscal 2023, on average, it is still considerably higher than the pre-Covid level of Rs 40,000 per tonne. Long steel prices for secondary players are also expected to see a small decline, driven by falling thermal coal prices, which in turn will drive primary TMT prices lower by an expected 1-3 per cent next fiscal.

Experts point out that the rise in domestic prices of steel, in the coming months, is not expected to be very steep, as the threat of imports will continue to loom over the domestic market. Interestingly, in the October-December quarter, domestic prices were trading at a significant premium vis-a-vis imports, leading to India becoming a net importer of finished steel.

The CRISIL report observes that even as global prices corrected by 10 per cent from mid-December lows till date, domestic prices saw only a minor uptick of 4-5 per cent. The report further observes that landed prices will thus continue to drive domestic prices as players will remain cautious so as to not lose volumes.