Steel prices in India have started firming up with long/flat prices up 10 per cent/ 4 per cent in the past two months, said a report by Kotak Institutional Equities. The price strength, it added, is led by strong domestic demand and the recent spike in raw material prices. “Weaker monsoon and seasonal restocking tightened the domestic market and allowed price hikes, notwithstanding sluggish regional prices,” the report said. Seaborne iron ore and coking coal prices have spiked in the past one month due to demand recovery and supply issues. “We expect steel margins to firm up in the near term, but cost inflation would require further price hikes to sustain margins,” it added.
Domestic HRC prices increased 4 per cent and rebar prices went up 10 per cent in the past two months of the second quarter of FY24. With Chinese export offering remained range-bound during this period, domestic prices are now trading at an 8-10 per cent premium to import parity levels. Domestic steel demand was 17 per cent/ 13 per cent in August 2023/ 5MFY24, which is ahead of the estimates by Kotak of 9 per cent on-year growth in FY2024E.
Seaborne iron ore/coking coal prices rallied 5 per cent/ 24 per cent in the past month. Iron ore has rallied on 1) the lack of steel production cuts in China, 2) three-year low iron ore inventory at Chinese ports and 3) positive sentiments after the announcement of stimulus related to the Chinese property market. Meanwhile, coking coal has seen demand improvement across key markets, mainly India, coinciding with lower supply from Australia, Canada and Russia, significantly tightening the market balance. “NMDC has recently raised prices by 7.3 per cent and given a discount to export parity prices, we see a further upside risk. Higher coking coal prices should hit Indian companies only toward the end-3QFY24,” the report by Kotak said.
“We expect domestic steel margins to improve in 2QFY24 for flat steel producers, as lower raw material costs would only be partly offset by lower realizations. We estimate $40-50/ton lower coking coal cost and Rs 700-800/ton lower iron ore cost for non-integrated producers. Down-trending steel prices in YTDFY24 suggest 2 per cent/ 7 per cent qoq lower steel prices for flat/longs in 2QFY24,” said Kotak, while adding that the recent spike in raw material prices, mainly coking coal, would hit steel companies from end-3QFY24 and would require further increases in steel prices to offset the margin impact.