Domestic Steel Prices To Remain Under Pressure As China's Oversupply Portends Higher Imports

The rating agency Icra has slashed its baseline steel price forecasts for FY2024, with average domestic hot rolled coil (HRC) prices being now expected to be lower by four to five per cent year-on-year (YoY) in FY2024, against a marginal YoY rise of one to two per cent expected earlier.

Steel prices have been on a declining trend at the start of FY2024, as falling Chinese export offers pulled down domestic HRC prices by 3.8 per cent in the current quarter so far. 

Domestic rebar prices also witnessed a similar trend, correcting by a steeper 4.8 per cent during the same period. 

According to Icra's latest research note on the steel sector, domestic steel demand remained resilient, growing by 7.2 per cent in April 2023. Any meaningful price recovery looks unlikely in the near term, given the external headwinds, it added.

Jayanta Roy, Senior Vice-president and Group Head, Corporate Sector Ratings Icra said, “CY2023 started on a positive note for the steel industry, as unlocking of the Chinese economy raised hopes for a meaningful recovery in steel demand in the world’s largest producing and consuming block."

Roy stated that while pent-up demand initially helped pull Chinese HRC export offers to a 9-month high of USD 695/MT2 by end-March 2023, the demand momentum appears to have lost steam thereafter. 

"This created a domestic oversupply, leading to the twin effects of Chinese HRC export offers sliding to USD 550/MT3 at present, representing a sharp 21 per cent correction in FY2024, and Chinese monthly steel exports reaching a two-year high of almost 8 million tonne (mt) in April 2023," he added.

Given these sharp corrections in Chinese HRC export offers, Icra's analysis suggested that domestic HRC prices are currently trading at a premium of USD 50/MT over Chinese imports. While Japanese HRC export offers are prevailing higher at USD 615/MT4 (against USD 550/MT for Chinese offers), given its duty-free access to the Indian market, domestic HRC prices are also trading at a premium of USD 25/MT over Japanese imports. 

This opens up the possibility of a steeper-than-expected rise in steel imports in FY2024, as trade flows get diverted to high-growth markets like India. 

"Therefore, unless the domestic premium reduces meaningfully from the prevailing highs, steel imports to India could climb by as much as 30 to 40 per cent YoY in FY2024, which can potentially make India a net steel importer in FY2024 after a gap of five years," the agency stated.

Meanwhile, steelmakers are however expected to get relief from a moderation in input costs in FY2024. The spot price of seaborne prime hard coking coal offers from Australia, which accounts for around 40 per cent of the overall steelmaking cost for a blast furnace operator, is expected to average at USD 255 to 260/MT5 in FY2024, lower by 20 to 25 per cent over FY2023 levels on account of improving supplies from Australia.