Steel prices in the domestic market are rising. This is a good news for the steel producers who have suffered significant loss of profitability in FY17, barring the later part of fourth quarter of last year. The pressure was actually building up as RBI mandated the banks to strictly regulate the NPAs that have taken more than 9.76% share of the total NPAs of the bank advances. Accordingly, the stipulations of Bankruptcy and Liquidation Act were invoked and some of the major defaulters like Essar Steel, Bhusan Steel and Electrotherm were referred to NLCT and measures initiated for internal restructuring of the units. A few more large and small units in the steel sector were also experiencing poor margins hitting their bottom lines severely.
Subdued demand from construction and infrastructure sectors and the major capital goods and consumer durable segments were also a major deterrent against improving the health of the sector. In FY17, steel consumption in the country grew by 2.6% over the previous year which has since moved up to around 4.4% in the recent period. Flash floods and logistics problems led to a sudden hike in global coking coal prices crossing $300/t fob Australia and with no corresponding rise in finished product prices it was really worrisome for the survival of steel industry. By this time the international prices led by China commenced their increasing trend. Domestic demand in China got a boost with the positive impact of a stimulus measure in the form of large infrastructure investment in road and rail networks, urban infrastructure and changes in the property market.
Chinese fixed asset investment rose by 8.6% in first half of the current year and investment in real estate was up by 8.1%. Manufacturing output in engines, metal containers, excavators, ship building rose sharply. More demand for steel in China got reflected in higher crude steel production (steel production rose by 5.1% over last year during January-July 2017), more import of iron ore (iron ore import rose by 9.3% during the first half of the current year), exports of coking coal also went down. As a result, while the increase in indigenous steel prices in China were helping the SOEs to raise their falling fortunes, the elimination of IF capacity to the extent of 45MT and restricting bank credits to the polluting steel units in the unorganised sector regulated surplus capacity particularly in the long product categories and this particular act has actually helped the domestic prices in China to move up.
Rising export prices of China literally pulled up the global prices. For instance, China raised its export price of HR Coils SS400 ex-Tianjin from $459/t fob in November 2016 to $552/t fob on August 26, 2017, by 20.3%, domestic prices in US mills were raised from $611/t ex-works in November 2016 to $630/t ex-works on August 26, 2017, by 3.1%. Indian steel prices went up from $533/t (inclusive of all taxes and levies) in November 2016 to $646/t (inclusive of 18% GST), by 21.2%. For rebar, the Chinese export offers rose from $406/t fob in November 2016 to $547/t fob on August 26, 2017, pulling up Turkey’s domestic prices from $516/t ex-works to $654/t during the same period. Indian domestic prices of rebar also witnessed similar price hike. That the global prices of iron ore have been hovering around $75-80/t cfr China during this period and coking coal prices are reaching $200/t fob Australia despite dropping to $ 140/t fob Australia in June’17 are primarily due to rising steel production and consumption in China during the current year.
China reduced its steel exports by 28% in the first half of the current year, enhancing domestic availability to cater to the rising domestic market.
What happens to the global steel prices if China loses its growing steel appetite, enhances exports avoiding the markets that had imposed trade sanctions against it and importing lower volume of iron ore. Some analysts envisage a sharp drop in Chinese domestic prices in the coming months as soon as the new stimulus measures are over. The upward tick in the US and the EU markets and the potential expansion in India, Vietnam, Turkey, Iran and South Africa are likely to provide adequate safeguards, if not full, against sudden drop in steel prices in Q4 and Q1 of next year.
The fluctuations in raw material prices (coking coal, iron ore, aluminium, scrap, electrode, molybdenum) due to factors unrelated to demand swing would continue, albeit by a lower margin. In the ultimate analysis, there is no substitute for strategic thrusts on reorientation of production profiles matching the exact market requirements, cost effective supply scheduling conforming to the project needs and forward planning of raw material sourcing.
(Views expressed are personal)