Industry gets busy in feeding rising domestic demand

Indian steel exports have been more or less on an upswing since April, 2020, when the country was in the firm grip of the lockdown on account of the pandemic. From 0.78 millon tonnes (MnT) in April, volumes spiralled to 2.31 MnT in May, dropped off a tad to 2.27 MnT in June, only to rise to a record 2.44 MnT in July.

Will the party continue into the second quarter and beyond? By the look of things, the trend may change as steel mills, interestingly, are now delaying their shipments. As per sources, some integrated private sector steel majors along with two large steel PSUs have delayed their export despatches by around a month. All the bookings being deferred, it seems, were done in June for July and August shipments. But, now, mills are asking for July shipments to be shifted to August, August consignments to be pushed back to September and September’s to be deferred to October.

Exports, it may be mentioned, had touched a record (provisional) 2.44 MnT in July, 2020, which is 7.5% higher over 2.27 MnT in June, 2020. Hot rolled coil (HRC) exports were also at 1 MnT in the month under review (July) while overall finished flats exports were at 1.26 MnT, rising marginally m-o-m over 1.25 MnT in June, 2020. Overall, from April-July, 2020, steel exports touched 7.8 MnT against 2.89 MnT in the same first four months of 2019-20, a whopping 169% rise year-on-year. Export volumes were at 5.36 MnT over April-June, 2020.

Domestic Demand & Prices

And the only reason behind the mills’ eagerness to delay their export shipments is that domestic demand is getting stronger, insist sources.

Prices have also gone up twice in the last one month in the domestic market, making it more lucrative. The mills are getting better prices compared to what they are fetching through exports. In fact, mills are earning INR 4,000-5,000 per tonne more in the domestic market at present, it is learnt.

Export prices have gone up too at present to over USD 500 per tonne FOB across ports on the east and west coasts of India compared to say USD 430 per tonne FOB in July. But exports do not look so attractive going forward because, first, some of the export orders have been booked at USD 500-plus prices and which will need to be serviced in September. Secondly, the scenario is not such that mills will be able to sell across buyers. On the other hand, they can sell at say INR 38,500 per tonne delivered to all the buyers in the domestic market. After deducting around INR 2,500 per tonne as freight rates in the domestic sector, if the mills sell even at say INR 34,000-35,000 per tonne to some of their best customers, this amount would be their net realisation ex-plant.

“The idea is to delay exports and use their resources to make quickly for the domestic market to earn their realisations faster. This can make a difference to their second quarter earnings. They can average it out and get better price realisations. The Q2 results can look brighter,” revealed a source.

Thirdly, HRC sourcing countries like Korea, Japan and others are all offering at USD 500/tonne or more FOB. Chinese mills are offering at USD 520 per tonne FOB and above. Steel players in these countries can afford to do so because their domestic markets are looking up, putting them in a position to raise their export prices. And India is no exception. Indian steel makers are aware that buyers with whom they have inked export contracts, will not cancel the orders or back out, even if shipments are delayed, because they know they will not get the material at the prices at which they had concluded these deals earlier, at around USD 430/tonne FOB.

“On an average the price increase in domestic and exports markets is almost USD 50-60 per tonne so the overseas buyers will accept the delay in shipments since they are getting that price advantage,” reasoned a source.

Continuation Of June Trend

Steel360 spoke to several analysts and the key takeaway is that July exports are a continuation of the June trend and that shipments which were supposed to happen in June got pushed back to July. And that JSW Steel, with 5.55 lakh tonnes, led the exports brigade. “JSW Steel had a sizeable contribution to the July steel exports figures. Their shipments which were supposed to have happened in June got carried forward to July because of the COVID-19 infection and subsequent quarantines at the plant in the previous month,” said a source.

While China had accounted for 70% of India’s steel exports in June, the share reduced to 40% in July. The other key export destinations included Vietnam, Spain, Italy, UAE, the UK and others.

Record Billets Exports

And the cherry on the cake in July, 2020 was billets exports, which crossed 1 MnT, an all-time high, against 0.82 MnT in June, up around 28% m-o-m. Of course, May had been a very good month for billets exports too, touching 0.99 MnT, since the country then was still in the throes of the lockdown and mills were desperate to keep their cash registers ringing, what with domestic demand at almost nil around then.

Billets will find their usage eventually in wire rods, rebars, angles, and channels. Giving reasons behind the high billets exports in July, a source said that the industry had been bracing for a lean domestic demand period in July and August, both months being part of the monsoon season and this year being made worse by the lockdown. Hence, the mills had pre-planned to book large volumes of billets export consignments in July and therefore the bloated billets basket is no surprise.

“July and August were just post-lockdown and there is no construction during the rainy season. So July shipments had been planned from before,” said the source.

But, importantly, sources also indicated that, henceforth, the industry is not likely to see such high billets exports. In fact, there is no further allocation in billets from mills like RINL, JSW, SAIL and others. “There is no exports allocation for billets from September till November,” a source informed.

Finished Longs Down

Finished longs were, however, down by around 35% to 0.13 MnT in July 2020 against 0.20 MnT in the previous month. Again, the reason behind this trend lies in increasing demand for rebars in the domestic market. Longs comprise mainly of wire rods and TMT bars. India is not self sufficient in wire rods production and so whatever is manufactured at home is sold to the domestic market, leaving little else for exports. The scenario is similar with TMT bars.

Outlook: Elevated Export Prices

November onwards, winter sets in in China when the country usually goes in for production cuts due to environmental reasons, which can goad it to look at imports. But, at the same time, if steel consuming industries close down during winter then Chinese mills would look to export too. Of course, it is not possible to predict China’s buying trend at this juncture but as of now it is bullish on buying from India.

Where India is concerned, generally, demand for steel starts picking up from November onwards after the festive season ends, when prices too head northward – and this trend is driven by demand and cost of raw materials. However, last year went against the trend. Demand was low, domestic traders did not purchase much from the mills, and prices languished. Hence, exports of finished flats, finished longs and semi-finished were on the higher side in October-December, 2019, to make up for lack of domestic appetite.

However, domestic demand started picking up from January, 2020 and from mid-January till February, it remained high, which, in turn, led to a drop in exports. Mills increased prices and traders, who sell the material to the retailers, did restocking, because they needed to feed the pent-up demand in the market – infrastructure and construction projects get a push towards fiscal-end. Traders had not been buying heavily since September, 2019 but dealing in small quantities due to lack of domestic requirements. So, once demand resumed, traders started booking heavy orders.

In fact, March saw a sharp drop in exports to 0.83 MnT, which meant domestic demand was on the higher side. It may be mentioned that prior to the lockdown, domestic demand was showing signs of recovery, because COVID-19 had already entered other nations forcing them into lockdowns, especially Europe and the Middle East. This, in turn, forced the Indian mills to focus more on the domestic market.

However, the scenario suddenly changed from the end of March, after the nation went into lockdown from the morning of March 24, 2020, with exports rising sharply from 0.78 MnT in April to 2.31 MnT in May.

Going forward, exports prices in September-October, 2020 are likely to remain elevated but whether deals will be struck at these levels will remain to be seen. The obvious reason is that domestic markets across South Asian economies like Thailand, Indonesia, the Philippines etc are looking up. Moreover, China has stopped exports to feed its domestic demand. Such a scenario bodes well for Indian steel makers, opening up home-grown demand opportunities. Thus, exports do look less attractive under such circumstances.