Explained: What is behind rise in steel prices

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Published: January 28, 2020 1:50 AM

It was apparent that unabated Chinese appetite for iron ore and coking coal on the back of 7% rise in crude steel production (China produced 904.2 MT of crude steel during January to November 2019) was the primary driver to this price trend.

Initially, the push for price rise for finished steel products came from the global price growth observed in major raw materials’ prices of iron ore and coking coal.

Steel prices in the past one month or so have been rising. It has provided some well deserved relief to the manufacturers suffering from declining revenue and postponing most of the capital expenditure plans. The festive months yielded benefits lower than what was generally envisaged and the lack of market demand appeared a major risk factor.

By end November last year it was widely believed by producers and users alike, that the decline in activities in the commodity segment has bottomed out, more so because the destocking process was thought to be nearly complete and largely this perception led to a gradual rise in price that was to be absorbed by the market.

Initially, the push for price rise for finished steel products came from the global price growth observed in major raw materials’ prices of iron ore and coking coal. The cfr China import prices of iron ore for 62% Fe which was ruling at $86/tonne in October 2019 rose to $96/tonne in January 2020, a growth of 11.6% within 3 months.

The fob Australian export price of premium low volume coking coal which was ruling at $145/tonne rose to $153/tonne, a rise of 5.5% in last 3 months. It was apparent that unabated Chinese appetite for iron ore and coking coal on the back of 7% rise in crude steel production (China produced 904.2 MT of crude steel during January to November 2019) was the primary driver to this price trend. It was followed by a rise in NMDC prices of iron ore and CIL prices of coking coal in the domestic market.

The cost increase in raw materials along with a perception of bottoming out in the market was evident in the consumers’ surveys carried out by RBI and other agencies which indicated that the purchasing managers’ views of the overall market situation had ceased deterioration and specifically the new order position, a sub-component in the surveys, reflected a growth.

The bottoming out perception was fuelled by the release of the first Advance Estimates of full year GDP of FY20 brought out by CSO that has put the GDP growth for the year at 5% against RBI estimates for 5% and the recent IMF projection of 4.8% of GDP growth for 2019. The expectation build up for reversing the downward trend by economic reforms in the critical sectors and stimulus measures in terms of higher public investment in infrastructure in the forthcoming Budget was also a contributory factor in lifting up the business sentiment. A regular rise in Sensex values during the period defied the fluctuations in the market outlook, however, reflected the sustainability of the equity market.

As a result of all these factors, steel prices moved up. In this case also, the upward movement in global prices has triggered the similar rise in domestic prices. For instance, while export price of HRC SS 400 ex-Tianjin China went up from $ 427/tonne to $500/tonne, an increase of 17.1% in 3 months, the benchmark HRC prices (ex-works Mumbai, without GST) shot up from Rs 34,500/tonne to Rs 38,000/tonne , a growth of 10.1% in last 3 months. The rebar export prices ex-Turkey which was ruling at $410/tonne went up to $430/tonne, a growth of 4.9% in 3 months, the Rebar 12mm prices in Indian domestic market at Rs 41,560/- (Mumbai, GST included) showed a similar rise. Billet prices in the global market rose from $362.5/tonne fob Turkey and reached $416.5/tonne in January 2020, a rise of 15%. Billets prices in the domestic market indicated similar rise during the period.

Price rise is the culmination of cost push and demand pull factors. In the current scenario it is felt that the push of the cost factors is relatively stronger, but the green shoots are being visible in real estate and consumer durable sectors. What is interesting to note is that the consumption of bars and rods in the first 9 months of the current fiscal has gone up by as high as 11.4% compared to the previous year.

The production of TMT Bars (carbon/Alloy/SS) during the period at 23.3 MT indicates regular flow of orders from infra, building and construction sectors, although it is lower than originally envisaged. As bars and rods include Wire Rods and Rounds which are primarily catered to by the SME sectors (current share 68%), the profitability and capacity utilisation in the SME sector in FY20 should be better compared to last year. The consumption of CRC has slightly gone down compared to last year due to slowdown in the auto sector and consumer goods (except the later months).

However, the consumption of GP/GC/Coated sheets has gone up by 4.4%. The consumption of HSM Plates has gone up, albeit marginally, during the period and as a major component of demand for this product belongs to engineering fabricators, it is reflective of a small improvement in the segment. The consumption of Structurals is positive by 3.6%. A 8.3% increase in Sponge

Iron production during the period and Scrap imports at 5.1 MT rising by 4.3% over last year have helped pencil ingot production to grow by 1.5%. The pellet consumption has increased by nearly 20% leading to a higher capacity utilisation of this important segment.

(Views expressed are personal)

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