Domestic demand lifts Indian flat steel prices

Domestic prices of hot-rolled coil (HRC) in India have increased by 16.35pc since the end of 2017 on the back of robust steel demand from the automobile and infrastructure sectors.

The Argus-assessed ex-works price of HRC was at 46,250 rupees/t ($689) on 1 June, the latest date of assessment, compared with Rs39,750/t on 29 December.

The automobile industry is among the three largest buyers of flat products in India. India's automobile output grew by around 15pc in the 2017-18 fiscal year ended 31 March at 29mn units. April output was higher by around 18pc from a year earlier, according to latest data.

Robust infrastructure spending on highways, bridges, railway lines and upgrading and building of ports and airports lifted India's steel consumption growth to 7.9pc at 90.68mn t in 2017-18.

Indian steel producers Sail, Tata Steel, JSW Steel and Essar Steel derive the largest chunk of their profit margins from the sale of flat products, which are typically sold via term contracts to automakers and equipment producers. Construction steel products are a much lower margin business, since most of the country's smaller steel producers make long products such as wire-rod and rebar, making it a competitive market. A slowing real estate market has also taken some of the sheen off the long products market, although buoyant infrastructure demand has offered support.

Profit margins of 22 large and mid-size Indian steel producers, accounting for 60pc of total capacity, increased to 25.4pc in the January-March quarter compared with 18.4pc for October-December, according to analysis by India-focused ratings agency Icra that closely tracks the steel sector. Lower raw material prices, especially falling domestic iron ore prices, and an increase in steel prices could lift profit margins higher in the April-June quarter.

But steel prices will possibly be pressured during July-September as monsoon rains slow down construction activity, as well as purchases of vehicles and consumer appliances in rural India with farmers spending mostly on cultivation-related expenses. Demand seasonally spikes in the harvesting season starting in October.

India's major steel participants expect steel demand to remain buoyant in 2018-19, although the rate of growth could be slower than 2017-18. Tata Steel expects demand growth of 6pc driven by demand for automobiles, engineering, railway and construction. JSW Steel is projecting demand growth of 7-7.5pc in 2018-19, driven by vehicle output growth, infrastructure projects and firmer consumer spending.

Federal infrastructure spending has been budgeted to grow by around 21pc to $89bn in 2018-19.

But there are concerns that more flat products, including HRC, cold-rolled coil and coated products, could enter India with surplus supplies becoming available globally with the imposition of a 25pc import duty on steel products. Most of India's steel imports and exports are flat products.

HRC exports from India have been outpriced by Chinese supplies in the key market of Vietnam since the end of last year but have become competitive over the past two to three weeks. Indian exporters have sold around 50,000-80,000t of HRC into Vietnam in this period, according to traders. A 50,000t Indian HRC cargo sold last week at $605/t. Some buyers in Vietnam are wary of booking Indian cargoes, anticipating a disruption to shipments during India's monsoon that peaks in July and August.