Steel price rises, but so do costs

3 Mar 2023 , 10:30 AM

Rising global steel prices have supported 10-13% uptick in domestic prices with flats at only a slight premium to the landed price of imports from FTA nations. With Chinese prices rising despite inventory build-up, analysts at IIFL Capital Services see further upside as gains from the re-opening flow in gradually in terms of demand. However, profitability is under pressure from rise in the cost of coking coal, INR depreciation and strong iron ore prices locally. Exports have recovered, aided also by improved spreads in Europe. 

Healthy steel price outlook

Domestic steel prices are up 10-13% versus December 2022 lows, with longs rising more than flats. Despite the rise, domestic prices are only at a slight premium to import parity prices from FTA countries, given that global prices have risen faster and INR has depreciated as well. Chinese steel prices have risen, despite the inventory build-up to levels higher than pre-COVID normal and positive spot BOF spreads (starting January 2023). Chinese investment in fixed asset construction has started to grow, driving the positivity. Continued gains from the reopening post CNY will be keenly watched, to gain further confidence on recovery in steel prices.

Profitability for domestic players yet to see gains

While jump in steel prices is a positive, jump in RM costs (both iron ore and coking coal) means that profitability will weaken post a QoQ uptick in Q4 (given the lag due to inventory levels) based on current price and cost levels. Meanwhile, exports from India have started to increase and are at better profitability QoQ with the European spot BOF spreads improving from an average of EUR221/t in Q3 to EUR287/t on spot basis. Profitability over the medium term for three large players would benefit from higher volumes, better mix and specific structural cost savings.