Steel prices in India have gone up by 10% for long steel and 4% for flat steel in the last two months, according to a report from Kotak Institutional Equities. This price increase is driven by strong demand within the country and the recent rise in raw material costs. The domestic market tightened due to a weaker monsoon and seasonal restocking, allowing for these price hikes, despite slower price growth in neighboring regions. The prices of seaborne iron ore and coking coal have also increased in the past month due to higher demand and supply problems. While steel producers may see improved profit margins in the short term, they may need to raise prices further to offset rising production costs.
In the last two months of the second quarter of the financial year 2024 (FY24), prices for domestic Hot Rolled Coils (HRC) increased by 4%, while rebar prices saw a 10% rise. During this time, the prices for Chinese steel exports remained relatively stable. As a result, domestic steel prices are now 8-10% higher than the prices at which it would be economically viable to import steel.
Furthermore, in August 2023 and the first five months of FY24, domestic steel demand increased by 17% and 13%, respectively. These numbers surpass the earlier estimates made by Kotak, which had predicted a 9% growth in steel demand for the entire FY24.
In the past month, prices for seaborne iron ore have increased by 5%, while coking coal prices have surged by 24%. The rise in iron ore prices can be attributed to several factors:
- China has not implemented significant cuts in steel production, which has boosted the demand for iron ore.
- Chinese ports have reached a three-year low in iron ore inventory, indicating a strong appetite for the material.
- Positive sentiments have emerged following announcements of stimulus measures related to the Chinese property market.
On the other hand, coking coal prices have gone up due to increased demand in key markets, particularly India. This higher demand coincides with reduced coking coal supply from countries like Australia, Canada, and Russia, resulting in a significant tightening of the market balance.
The Kotak report also mentions that NMDC has recently raised its prices by 7.3% and offered discounts to match export prices. This suggests the possibility of further price increases. However, the impact of higher coking coal prices on Indian companies is expected to be felt toward the end of the third quarter of FY24.
“We anticipate that flat steel producers will see improved profit margins in the second quarter of FY24 due to reduced costs of raw materials, although this benefit will be somewhat offset by lower selling prices. Specifically, we estimate a decrease of $40-50 per ton in coking coal costs and a reduction of Rs 700-800 per ton in iron ore costs for steel producers who are not integrated (those that do not produce their own raw materials).
However, it’s worth noting that steel prices have been declining year-to-date in FY24, and we expect a 2% decrease in flat steel prices and a 7% decrease in long steel prices in the second quarter of FY24. Kotak also mentioned that the recent increase in raw material prices, especially for coking coal, will start affecting steel companies from the end of the third quarter of FY24. To maintain their profit margins, steel companies may need to implement further price hikes.”