Weak demand may force steel mills to offer discounts in the short-term

Demand growth had moderated to 6.4 per cent in April 2019 and ICRA said it was likely to remain lower than the FY19 Q1

Domestic steel mills have increased prices upto 1,000 a tonne in some product lines to adjust the cost push but weak demand may lead to discounts in the short-term.

“The increase in the flat segment has not been across the board. We have raised prices of products catering to the three segments — heavy engineering, infrastructure and hydrocarbons,” said a producer. Another producer said it was difficult selling products at these prices. “After raising prices, it is likely that producers will have to resort to discounts,” he said. The increase ranging between Rs 750 and Rs 1,000 a tonne was in monthly contracts while quarterly contracts remained unchanged.

The adjustment, producers said, was largely led by input cost. "Steel prices in April and May had dipped more than international prices and hence prices have been corrected while input costs had increased," said a major producer, while admitting that the sentiment was weak.

For those having higher exposure to the trade segment, there was hardly any bargaining power. 

Demand growth had moderated to 6.4 per cent in April 2019 and ICRA, in its recent report, said it was likely to remain lower than the FY19 Q1 levels due to continued weakness in the auto sector and reduced construction-related activities during the general election period. 

Domestic steel consumption growth had eased to 7.5 per cent in FY19 from 7.9 per cent in FY18 due to liquidity and fuel price related headwinds faced by the auto sector during the second half.

A secondary producer said that in some of the products (month-on-month), current prices were actually lower.

However, a producer pointed out that sentiment had changed a bit, becoming positive after the general election. 

"The market has bottomed out and H2 was looking better," he said.

There was a surge in demand from the construction segment before the onset of monsoon. But demand from the automotive segment continued to be weak, putting pressure on prices of hot rolled and cold rolled coils. Import offers are also down by $10-$15 a tonne.  

Moreover, in China, hot rolled coil prices had dipped to below $500 a tonne for some products on Tuesday. ICRA senior vice-president Jayanta Roy said it was likely to be related to trade uncertainty and nervousness about the economy.

The lower import offers again would keep prices under pressure. Imports to India were in the range of 450,000 tonnes a month, primarily from Japan, Korea, and Iran to an extent.

Apart from pricing pressure, input cost has been a cause for concern for producers. In fact, demand for an increase in prices this month was led by a cost push. Spot coking coal prices have eased to $202 a tonne currently but it remained above the $200 levels for the calendar year. Coking coal accounts for 40-45 per cent of the steel making cost.

A let-up in input cost would help ease the margin pressure for steel companies that were selling at a discount to import offers. 

However, ICRA expects that a meaningful price improvement would happen only in H2 of FY20, when infrastructure spending is likely to gain momentum and the auto sector is expected to do well on the back of pre-buying, ahead of the BS-VI rollout. 

International steel prices would also remain a strong determinant for domestic prices, ICRA said.