India steel demand contracts 4.4% in May

Moneylife Digital Team 10 June 2013

Despite the weaker demand scenario, India turned to a net importer of steel (net imports: 161 kilo tonnes) in May, from net exporter (net exports: 105 kilo tonnes) in April

As per the Joint Plant Committee (JPC), India steel demand contracted by 4.4% y-o-y in May, remaining weak. For the first two months in FY14, steel demand has come down by 0.8% y-o-y. India steel demand growth in April 2013 was 3.5% y-o-y, in line with FY13 demand growth of 3.3%. May saw continued contraction in demand after a weak 4QFY13, Nomura Equity Research said in its Quick Note on the steel industry.

According to the brokerage, the JPC revised the May 2012 data upwards (from 6.2 million tonnes (MT) reported earlier to 6.4 MT). On the previously reported data, India steel demand in May 2013 would have been down 1.5% y-o-y.

Despite the weaker demand scenario, India turned to a net importer of steel (net imports: 161 kilo tonnes) in May, from net exporter (net exports: 105 kt) in April. India imported 548 kt of steel in May, up from 350 kt in April but down from 857 kt in May 2012. However, corresponding exports were 387 kt against 455kt in April 2013 and 341kt in May 2012. The higher imports m-o-m could be because Indian domestic steel prices are now at import parity compared to a discount of around 3% in April 2013.

Global steel prices have come down by around 15% in the past three months, with China export prices at $515 per tonne (from $615 per tonne in February 2013) and European

HRC prices at $588 per tonne (from $680 per tonne in Feb 2013). However, the impact of lower steel prices should be mitigated by a fall in raw material prices. Iron ore spot prices have come down from $157 per tonne in February 2013 to $115 per tonne in May 2013, and coking coal prices have also fallen from $170 per tonne to $145 per tonne correspondingly.

As a result, total raw material costs have come down by $85 per tonne against a $100 per tonne fall in steel prices.

Indian domestic steel prices have come down by around 2% in the past three months, compared to a 15% fall in global prices. Indian prices were at a discount of 8%-10% to import parity during February 2013. At the current level, Indian prices are at par with landed cost of imports. Indian prices have also been supported by around 5% rupee depreciation during the same period, Nomura said.

The brokerage expects Indian domestic prices to remain at a discount of 1%-2% on an average for FY14 as steel demand is expected to remain under pressure and India should at best have a balanced demand-supply scenario.

Global steel trader inventory has started to come off with destocking. While global inventory has come down from a high of around 40 MT in March 2013 to 35 MT in May 2013, China trader inventory has also come down from around 21 MT to around 17.5 MT during the same period.

Nomura expects destocking of inventory to continue for the next 2-3 months as we enter the weaker steel demand period and typically traders liquidate inventory during this period. As a result, steel prices are expected to remain under pressure for the next 2-3 months.

Nomura believes the next 2-3 months will remain tough for India steel companies given domestic demand remains weak. At the same time, pricing pressure will continue with global prices remaining weak, it added. Although the brokerage maintains ‘Buy’ on Tata Steel, near-term pressure on the stock will likely persist.

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