Domestic steel prices defied predictions and ascended through the December quarter as three tailwinds converged -- high global prices, tight domestic supply on account of iron ore shortage, and healthy demand growth, Crisil research report said on Monday.
Accordingly, steel makers have raised the prices of benchmark hot-rolled coils (HRC; average monthly price) multiple times since August, rising by as much as Rs 13,800 per to Rs 51,050 per tonne in December (37 per cent on-year growth).
Importantly, despite this material increase, domestic prices are still 6-8 per cent below global landed prices.
Put another way, there is a room to raise the domestic prices further given they move in sync with the world trend.
China HRC f.o.b. (free on board) prices, after plunging to $409 per tonne in April from $499 per tonne in January 2020, rebounded to $647 per tonne between April and December 2020.
Global prices also touched an 8-year high in December on healthy demand and cost push from soaring iron-ore prices. Chinese crude steel production increased eight per cent in the period, while exports and inventories remained low indicating robust demand growth there.
We expect steel prices to remain high in the January-March 2021 quarter with a sequential price hike of Rs 7,000- 8,500 per tonne, the ratings agency said in its research report.
Consequently, flat steel prices are seen 14-15 per cent higher on-year this fiscal, the report added.
Domestic demand recovered to the pre-pandemic (February) level in August itself with normalisation of activities in the construction and consumption-linked sectors, but a full-blown recovery was seen only in November when sales volume surged 11 per cent on-year.
The demand momentum should continue in January-March. Growth will also be bolstered by the statistical low-base effect of fiscal 2020, the report said.
That would limit the contraction in steel demand this fiscal to 9-11 per cent, compared with our previous forecast of a 17- 20 per cent de-growth, the report added.
On the raw materials front, domestic iron ore supply could not match demand from steel mills as only 6-7 of the 19 auctioned mines in Odisha could begin mining operations. Of these, most were won by steelmakers for captive consumption. The 19 mines used to sell 65-70 million tonne of iron ore to merchant markets in eastern India. The tight supply augured well for domestic iron ore prices, which more than doubled from May-June levels to Rs 4,360 per tonne in December. However, it remains 60-65 per cent cheaper than landed iron ore prices.
Coking coal prices, on the other hand, have declined, led by low procurement from China amid stable supply. Improved realisation, healthy demand and lower coking coal prices augur well for the operating margins of steel mills, especially in the second half of the current fiscal. As a result, large steel mills, excluding the public sector ones, should see a 550-650 basis points (bps) Ebitda margin expansion this fiscal, Crisil said.
Given all this, we expect the large steelmakers (excluding the public sector ones) to clock an impressive 800-1000 bps improvement in their Ebitda margins (on-year) in the second half of this fiscal, riding on the tailwinds of a 35 per cent increase in domestic steel prices, a 30-35 per cent decline in coking coal prices, and surging demand, the research report said.