India’s economic recovery gained further momentum in Q3 of the current fiscal driven by the cumulative domestic steel demand in Oct-Nov, that has already surpassed the pre-COVID levels of prior-year period, according to a report by ICRA, a credit rating agency.
ICRA predicts the recovery in domestic steel demand to sustain in the near term.
Jayanta Roy, senior vice-president & group head of corporate sector ratings, ICRA, said that in FY2021, steel demand is forecast to contract around 12pc, significantly better than their initial forecast of a 23pc made in April 2020. “The sector outlook is also revised to ‘Stable’ from ‘Negative’,” Roy said.
Steel margins improve
In Q3 FY2021, amid rising domestic iron ore prices, steelmakers are poised to report one of their best quarterly performances in the past several years.
Steel exports from India have dropped sharply in recent months to touch 0.6mn mt compared to an average of 1mn mt in H1 FY2021. Recovery in domestic demand shifted mills’ focus to domestic sales rather than exports.
Steel imports in India remained limited, which is likely to increase as traders look to take advantage of the arbitrage window between domestic and landed prices, especially from Free trade agreement countries and under RECP agreement including Japan and Korea attracting nil import duty. These prices act as a ceiling for domestic HRC prices.
HRC prices jump 40-45pc
Domestic HRC prices revised multiple times in the last five months, recovering from Rs36,000/mt levels in July 2020 to Rs51,000/mt ex-works Mumbai in early December. Price gained above 40pc in a short period supported by improving demand from the automobile and white goods sectors, rising international prices and a cost-push in the form of higher domestic iron ore prices following the supply disruption in Odisha.
Crude steel production by top six steel producers has risen to about 65pc share in total production in recent months. Capacity consumption by the top six producers rose to 85pc in October 2020 and other steel producers are still operating at capacity utilization rates of about 65pc. As against the average industry capacity utilization of 78pc for the period FY20216-FY2020.
High raw material prices
Domestic iron ore prices have more than doubled in Odisha since the end-June of 2020 following supply shortages. Less than half of the 18 mines which were auctioned earlier this year are operational. High exports of iron ore and pellet also adversely affected its availability to domestic steel mills.
ICRA’s analysis suggests that the supply shortage in the FY2021 could be over 50mn mt, and the shortage could persist for the next 6-9 months unless new miners are able to quickly ramp-up production or proactive steps are taken by the government to shore up domestic supplies.