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Big steelmakers see demand revival from auto, infra; high iron ore prices stifle small producers

Nevin John     September 29, 2020

The big steelmakers in the country are back on track with increasing domestic demand and steel shortage in overseas markets. The demand has driven the domestic prices high as hot-rolled coil (HRC) steel price went up 15 per cent in the last two months, while the price of long products jumped 11 per cent.

The HRC price is 9 per cent above pre-COVID levels of March, but long products are 4 per cent below pre-COVID levels. Domestic demand is largely driven by  auto and white goods sectors, besides  marginal uptick in government infrastructure projects. The automakers and white goods producers are increasing production for the festival season.

In August, Tata Steel operated at 100 per cent capacity for the first time since the nationwide lockdown. JSW Steel saw 15 per cent growth in flat steel products in August, while crude steel production rose 5 per cent year-on-year. Jindal Steel and Power Ltd sold 625,000 tonnes of steel in the domestic market in August, up 37 per cent compared to a year ago period.

Motilal Oswal said in its report, India's steel sector has turned the corner with recovery in domestic demand and improved margins. "This is led by sharp price hikes (supported by higher regional steel prices, particularly for flat steel) and lower raw material cost (despite recent rise)," it added.

The equity research agency said, the regional HRC price is unlikely to rise further as the price of iron ore corrects in subsequent months. India's largest iron ore producer, state-run NMDC, has raised its monthly domestic prices for September to a 22-month high as the removal of Covid-19 lockdown restrictions boosts demand.

The high volume export to China is another reason for rise in ore prices in India. In the first half of 2020, Indian mining groups doubled iron ore shipments to China to 20 million tonne, compared to the same period last year.

Iron ore supplies from Brazil have been normalising, and port inventories in China have been rising. It is a sign that the prices will taper down. However, the high iron ore prices don't hit the big steelmakers as most of them have captive mines. However, smaller players are severely hurt by the rise in iron ore prices, say industry experts.

Another advantage for the steelmakers is the falling coking coal prices. Seaborne coking coal prices fell by 35 per cent between March and August after industrial activities halted in Japan, Europe, South Korea and India. Considering the 2-3 months lag in import orders reaching Indian ports, the bigger benefit of low coking coal price would reflect in the companies' margins in September quarter.

"It helps the top 5-6 steelmakers in the country, while the medium and small players are still struggling," says an executive with a steel company. The small steel producers have to cut production because of severe shortage of raw material and higher input costs. The lower coking coal and iron ore prices will improve the margins of steelmaker further in the third quarter.

The recent spike in steel prices has prompted some consumer groups to call for government intervention. Federation of Punjab Small Industries (Fopsia) said  domestic steel buyers are facing a supply shortage since June as integrated mills only sell material to big traders who are hoarding steel with the intention of raising prices.

The Federation of Indian Mineral Industries (FIMI) has red-flagged the steep increase and said it will lead to windfall gains for a few steel companies.

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