A gradual increase in global steel supplies driven by a successive rise in crude steel output could weigh down the global steel prices, yet the downside could be limited, anticipates CARE Ratings.
The spreads for steel mills are likely to remain high, ensuring firm profitability in the second half of 2021. CARE Ratings expects that the global steel prices are likely to follow the trend in iron ore prices. Despite likely downside correction in steel prices, a drop in iron ore could keep spreads elevated.
During the first five months of 2021, led by China and India, global steel production recorded a growth of 15pc . Prices for finished steel products and raw material along with logistic costs showed a continuous uptrend with a wide supply-demand gap during the last 12 months.
For the June-September quarter, major steel mills are targeting higher profit margins. Large primary steel producers including Tata Steel, AM/NS, JSW Steel, Jindal Steel & Power and Steel Authority of India (Sail) have access to domestic iron ore from captive mines, which safeguards them for volatile international ore prices. While, smaller steelmakers might continue to struggle with high ore and scrap prices.
Despite possible declines, a sharp downward correction is unlikely. With most economies returning to normalcy and increased vaccination against COVID-19, steel demand is expected to bolster in the coming days. Although most countries have relaxed lockdowns, a resurgence of the virus in a few countries may delay recovery. Also, many governments have announced various stimulus packages and infrastructural projects, which could boost steel demand.
In India, the impact of the second wave of COVID and the fear of a third wave has muted steel demand in some sectors. Additionally, the arrival of the monsoon has led to bearish sentiments. However, steel demand is expected to rebound actively post-monsoon with recovery in the infrastructure and construction sectors.
To ensure steady sales volumes, some mills are offering discounts of around $30-50/mt in the domestic market compared to international levels. While primary steelmakers are focusing on exports amid weak domestic demand.
There is supply tightness in the domestic iron ore market, still, mills have access to ore at a discount compared to international prices. Also, the slowdown in Chinese exports and the announcement of around 15pc export taxes on Russian steel and scrap exports have opened up a sizeable overseas opportunity for Indian steelmakers.
Strong demand prospects in Europe and Southeast Asia are expected to offset the Rs2,000-3,000/mt ($26.75-$40.13/mt) drop in prices in July, which could rebound in August.
($1 = Rs74.74)