The rally in iron ore-to-steel has reached levels unprecedented since 2008, sparking a debate whether it’s a super-cycle or a strategic change in the industry.
Global iron ore (62 per cent Australia to China CIF) prices averaged at $178 a tonne in April 2021 versus $120 a tonne in October. Prices of the key steelmaking ingredient have now crossed $200 a tonne in early May, which is the highest since the global financial crisis in 2008.
NMDC, the Indian public sector iron ore producer, increased prices by 29.64 per cent and lump ore by 10 per cent effective May 12 after futures on China’s Dalian Commodity Exchange set a record on Monday.
NMDC has significantly pushed prices upward, the highest in 11 years, said Ranjan Dhar, chief marketing officer of ArcelorMittal Nippon Steel India (AM/NS India).
But it’s not just iron ore. Globally, ferrous metals have been on the rise. International scrap (Rotterdam FOB) prices have risen by over $120 a tonne in the last six months and global steel prices (China HR FOB) have crossed the highs seen in 2008 crisis of $1029 a tonne in early May to an all-time high, according to CRISIL Research.
China HR FOB Prices rose from $510 per tonne in October 2020 to average at $863 per tonne in Apr 2021. Prices are now hovering at $1050 per tonne in the second week of May 2021.
India’s domestic market has rising since November, except for a pause in February during the Chinese New Year holidays.
NMDC lump ore prices have increased by about 122 per cent and fines by 107 per cent since October. Prices of domestic HRC (hot rolled coil), used in vehicles and consumer products, increased by about 54 per cent since October.
“The steel price rally that we have seen is majorly driven by strong demand in China and its recent announcements on the supply front, recovery in demand from EU and US and the ever increasing iron ore prices,” said Isha Chaudhary, director, CRISIL Research. Domestic prices follow global price trends.
Dhar, however, pointed out that steel prices in India were the lowest currently, despite escalating raw material cost.
“The lowest international price is $1030 for domestic HRC in Vietnam. At that level, there is about a Rs 9,000 a tonne gap with India,” he said.
Steelmakers in India believe that the rally is led by a structural change and it’s different from just a commodity cycle playing out. The argument in favour of that is a change in consumption pattern.
Super-cycle or structural change?
Jayant Acharya, director for commercial & marketing, JSW Steel, said, the steel industry is going through a structural change.
“As we see the situation today, tighter norms on carbon emissions in Europe, China and other parts of the world will contain the steel supplies in various regions globally with increasing cost of compliance,” he said.
On the other side, he added, steel demand will rise as many developed nations are focusing on replacing existing infrastructure while developing countries are building infrastructure. “Climate change actions will encourage more capacities in renewable energy,” Acharya said.
Dhar, too, felt that a new consumption pattern was emerging, some of which was induced by the Covid-19 pandemic.
“People are spending more time indoors because of which appliance sales are rising, as expenditure on travel and entertainment is shrinking. The automotive sector is witnessing a temporary blip but is expected to rebound strongly as there is a robust order pipeline,” Dhar said.
But Chaudhary believes that the current price rally is a super-cycle rather than a structural shift. “From July onwards, we expect price correction to begin as China’s steel demand moderates and iron ore supply in both global and domestic market improves,” she said.
Steel spreads
But Q1FY22 is expected to remain strong, according to Chaudhary, primarily on high global price (which increases global landed prices), high export realizations supporting domestic prices, high iron ore cost and low inventory levels in India.
What is adding to the advantage of steelmakers is that coking coal (another key raw material for steelmaking) continues to remain weak and prices have fallen by 9 per cent from $121 a tonne in October 2020 to $110 in April 2021.
That has taken steel-raw material spreads to record levels, particularly for big Indian steelmakers that have captive iron ore mines unlike many global peers.
Steelmakers expect the rally in prices to continue even as coronavirus lockdowns dragged demand in April.
According to a Motilal Oswal report, steel consumption declined 26 per cent month-on-month (to 6.7 million tonnes) in April, but low inventory levels was a silver lining. “We expect domestic demand to weaken further in May, partly compensated by higher exports,” it said.
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