Commodity Analysis

Limited upside to steel prices in 2020

Satya Sontanam | Updated on December 15, 2019 Published on December 15, 2019

Demand forecast for next year is bleak while supply from China is expected to be stable

The global steel industry, which was in the doldrums from mid-2014 to late-2016, seems to be on thin ice again. This time, the upward trajectory was interrupted by the 25 per cent tariff on steel announced in February 2018 by US President Donald Trump.

The health of the steel industry, which is directly proportional to global economic activity, began weakening due to the uncertainties in global trade, Brexit and the dampening of the key user industries such as construction and automotive across the globe.

The Indian steel industry has been hit, in addition to the global factors, by the fall in domestic consumption, which had acted as a buffer. Dependence on export market, higher inventory levels, downward movement of prices and a rise in imports are other headwinds for the industry domestically.

Going ahead, while users could benefit from lower prices, manufacturers and traders need to brace themselves for margins getting narrower due to higher raw material prices.

What happened in 2018, 2019?

The prospects of the Indian steel industry were healthy until August 2018, when the tariffs announced by the US on its steel imports came into effect.

In 2018, India’s steel exports fell 32 per cent to 11 million tonnes compared with the previous year’s outbound shipments.

Though India’s share of steel exports to the US was minimal, excess supply in the global market impacted exports.

As per the Steel Statistical Yearbook 2019 from the World Steel Association (WSA), India’s steel consumption in 2018 went up 3.5 per cent to 104 million tonnes against growth rates of about 6 per cent and 6.8 per cent recorded in 2016 and 2017, respectively.

In 2018, steel companies stayed afloat and managed to maintain higher profitability on the back of stable demand from the domestic market and higher steel prices than previous periods.

The year 2019 started on a positive note with a mild recovery in demand and rising steel prices. However, this didn’t last long.

Weak performance of the two key sectors — auto and construction — due to the liquidity crunch in the country, impacted the steel demand. As per data from ICRA Ratings, the domestic steel demand growth has been steadily decelerating from Q2 of 2019 — from 6.9 per cent growth (y-o-y) in April-June to 3.1 per cent in the quarter ended September, and slipping into the negative territory in the first two months of Q4 of 2019 (October and November), at -1.8 per cent.

With domestic demand weakening, Indian steel manufacturers increased exports.

Despite exports, the steel industry’s inventory swelled. As per data collated by CRISIL Research, from the second quarter of 2019, inventory has been at an average of about 14 million tonnes per month as against an average of about 11 million tonnes in 2018.

As a result, steel prices took a deadly blow. In 2019, steel prices have dropped about 18 per cent to ₹36,000/tonne from an average of about ₹44,000/tonne in 2018.

Steel manufacturers have also been burdened by increasing steel imports. In spite of protectionist measures from the government, steel imports rose from Japan and South Korea, with which India has signed free-trade agreements.

Modest outlook

The global steel demand in 2020 is expected to be worse than in 2019, due to the weakness in China’s manufacturing sector and its slowing economy.

Chinese steel demand in 2020, as forecast by the WSA, is expected to grow just one per cent in 2020 as against 7.8 per cent (estimated) in 2019.

However, with the new trade deal between the US and China that includes averting the December 15 tariff imposition (on about $160 billion of consumer goods from China) and a possible reduction of existing duties on Chinese products, global trade uncertainities could settle to an extent. This will be further aided by Boris Johnson’s landslide victory in Britain (paving the way for Brexit). Thus, the improved market sentiment could push the global demand for steel, giving a leg-up to prices.

Though developed and developing countries (excluding China) are set to rebound from the low levels of demand seen in 2019, the global steel demand, weighed down by China, is expected to grow just 1.7 per cent in 2020 as against 3.9 per cent (estimated) in 2019.

In terms of supply, with winter production control in China being less severe than last year, and the re-opening of steel units in the US, steel supply in the global market may remain stable.

With low demand and stable supply, the upward movement of global steel prices could face headwinds going ahead. The benchmark Chinese HRC (hot-rolled coil) steel sheet now trades at about $550 per tonne as against an average of $622 per tonne in the last year.

Also, the northward movement of steel prices is further threatened by Trump’s announcement of imposition of tariffs on Brazil, one of the top exporters of steel to the US. Excess steel in Brazil might end up as a surplus in the global market.

Following the global cues, upward movement of Indian steel prices is also expected to be limited. Priyesh Ruparelia, Vice-President and Co-Head, Corporate Sector Ratings, ICRA, says: “Unless there is a drastic demand uptick supported by infrastructure spending by the government, average HRC prices in FY2020 are expected to remain at about ₹36,000 per tonne compared with about ₹44,000 per tonne witnessed in the previous year.”

A probable hike in iron-ore prices, especially due to the ongoing issues with iron-ore mining in India, could raise the input costs of steel producers and traders, and could exert pressure on their profitability.

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Published on December 15, 2019
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