Indian crude steel output is expected to fall by 20-25pc this year, mildly recover in 2021 and return to pre COVID-19 levels in 2022, according to market makers. 

 

During the 10-week lockdown, output at mills dropped by 50pc to 100pc depending on the type of furnace and product. Overall, capacity utilization rates fell to 35pc in April and clawed back some ground in May. Steel production rates across India have begun a gradual recovery but with labour shortages acute and demand unclear beyond a 6-week horizon, near-term sentiment is negative.

 

Still, rural India will offer some respite for the next four months.

 

Current fundamentals

Producers of flat steels and semis received some respite from a short-term opportunity to export to southeast Asian countries that were previously importing from China, and to a lesser degree importing from Japan and Russia. 

 

China’s imports of metallics and semi products like billets soared over the past few months as steel output rates rushed back to normalcy significantly faster than anticipated and well before supply disruptions to domestic scrap and seaborne iron ore could be resolved. 

 

Till date, China’s crude steel production rate continues to outpace iron ore and domestic scrap supply. 

 

Chinese raw material demand along with a supply tightness in Europe and North America has caused iron prices to surge and supported a recent uptick in global seaborne scrap markets. This was one contributor to the recent run up in Indian domestic scrap prices. 

 

Bulk scrap into Turkey reached levels of $265-267/mt cfr for HMS 1/2 (80:20) in the week ended 14 June, with bulk shredded into India trending at $285-290/mt cfr in the same week. 

 

Many market participants feel the market is at or nearing a peak because July outlooks in the domestic markets of major supplying regions like North America and Europe are weakening.

 

For example, scrap supply has begun to improve in the US, relative to demand, which caused US domestic prices to drop in June.

 

Long steels

A full recovery in Indian steel consumption and demand is expected to take at least 18 months, which could place severe pressure on small and medium-sized steel makers as liquidity issues escalate, currency weakens and spreads to raw materials tighten. 

 

Still, for the next 12 months, long steel producers are expected to fare better than flat steel producers.

 

This is primarily driven by a hope for strong infrastructure spending by the central government, where strong equals the spend not falling by more than 15pc below last financial year’s levels. 

 

Such a program would support long products makers since infrastructure and construction spending account for 65-70pc of Indian steel consumption. 

 

Flat steels

For flat steels, the main end use sectors are automotive, which accounts for up to 15pc of total Indian steel consumption – and appliance manufacturing.

 

A bleak outlook on automotive and appliance production suggests that flat rolled producers are staring at weaker fundamentals than their long products peers.

 

Used car sales and two-wheeler sales are expected to receive support from people opting out of public transport while new car sales are forecast to drop by 20-25pc this year, and recover by 5-10pc in 2021.

 

Steel spreads

Steel to raw material spreads have held in recent weeks for flats and longs producers but are expected to tighten as the year progresses.

 

For scrap suppliers and traders, and furnaces reliant on scrap imports, a big concern is a weakening Indian rupee. 

 

Forecasts suggest the rupee will gradually weaken by the end of the year to 78 to 79 against the dollar, from the current 75-76 range.

 

There seems to be mutual consensus that the rupee will weaken further in 2021 to a range of 77-81; driven primarily by growing inflation in India outpacing inflation in the US.

 

This could cause severe margin squeeze for EAFs and Induction Furnaces that import scrap on a dollar basis but sell finished product on an INR basis. 

 

Should sponge iron prices rise with iron ore prices later this year and into next year, as auction winners scramble to recover the high prices paid for mine off-takes, the margin squeeze on furnaces could be quite significant next year.

 

Rising domestic iron ore prices could also squeeze spreads at BOFs as it is expected to come at a time when inventory builds at BOFs outpace demand and pressure HRC prices.

 

Outlook

Outside of pent up demand that is driving the current market, one pocket of strength for the next 3-4 months is expected to be rural India where the lockdown impact has been far less, and where forecasts of a normal monsoon will result in increased spending on farming and transportation equipment. 

 

In the near term, Indian steel output is expected to ramp up capacity utilization rates to around 60-65pc by the last quarter of this year as workers return to plants, the monsoon ends and infrastructure and construction spending picks up.

 

The big unknowns are the size of government spending and the state of the economy once pent up demand is catered to during the next three months.

 

Overall, forecasts suggest Indian crude steel output will drop by 20-25pc in calendar 2020 (y-o-y), and claw back by 8-10pc in 2021. This is similar to forecasts for most steel producing countries (barring China) and suggests that it will take until at least 2022 for the industry to return to pre-Covid activity.

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