Steel Prices Take a Hit as China's Demand Falters - Is the Industry in Hot Water?

New Delhi: In FY24, Steel prices have been on a downward trend due to weakened demand in China. As the leading consumer of commodities, China's Steel prices set the tone for the global Steel industry. In response to the decline in domestic demand, China has ramped up its exports to markets such as India. The market price of domestic Hot Rolled Coil (HRC) dropped in a week, reaching a new low of Rs.58,200 per tonne on May 21^st.

Chinese export prices have dropped by a substantial 20% ($115 per tonne) in the last month, leading to concerns among dealers due to weak domestic demand. The situation has been worsened by increased import bookings, causing a persistent downturn in prices. Currently, Chinese export prices are at $550 per tonne, with major mills in China and Vietnam also reducing their May 2023 listing prices. Furthermore, domestic HRC prices are trading at a premium of $50 per tonne over Chinese imports and $25 per tonne over Japanese imports (which enjoy duty-free access to the Indian market). This pressure on domestic Steel prices is expected to continue, with Indian manufacturers facing the double challenge of slower demand pickup and reduced realizations. Pricing pressure has been mounting since March, making it a challenging time for the industry.

The current market trend suggests that the baseline Steel prices forecasted for FY24 are not looking favourable. Domestic prices for HRC and rebar have fallen by 3.8% and 4.8%, respectively, this quarter. Unfortunately, any significant price recovery soon seems unlikely due to external factors. As a result, it is now anticipated that average domestic HRC prices will be lower by 4-5% year-on-year in FY24, instead of an earlier projection of a marginal increase of 1-2%. This decrease in realizations may put pressure on the profitability of Steel companies. However, there is some hope as prices of raw materials such as coal and iron ore have also decreased, providing a cushion. For instance, prices for iron ore, excluding China, which reached $130 per tonne during the March quarter, have fallen to around $100 per tonne due to subdued Steel demand. Even India's largest iron ore producer, NMDC Ltd, had to reduce prices in April by ?300 per tonne for lump ores to Rs.4,200 per tonne, and by Rs.100 per tonne for fines to Rs.4,010.

Coal prices have experienced a decline from the last quarter's $400 a tonne levels to under $330 per tonne. Despite this trend, there are positive developments such as improved supplies from Australia, reduced domestic e-auction premiums, and increased availability of coal. The seaborne prime hard coking coal's spot price from Australia is predicted to drop by 20-25% in FY24 compared to FY23 levels, averaging around $255-$260 per tonne as per forecasts. In April, the thermal coal prices fell due to the decline in Coal India's domestic e-auction premium from an average of 265% in FY2023 to 137%. Although Steel price corrections have impacted the current fiscal year, moderation in input cost is expected to partially offset the effect, resulting in the industry's operating profit margins being maintained at 12-13% in FY24, in line with FY23 levels.