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If China sneezes, Indian steelmakers may catch a cold

On 12 March, iron ore prices fell to their lowest in 2018 so far, at $66/tonne for ore with 62% iron content delivered to Qingdao port, shows Bloomberg data. That’s a 9.5% decline from its level in early-January and prices have been declining recently, causing worry lines in the industry.

China accounts for 49% of the world’s steel output. The price decline was driven by fears that steel demand from end-use industries such as construction could be weaker than expected. With steel and iron ore stockpiled before the Chinese New Year holidays, a longer wait to clear inventories hit prices.

But on Wednesday, economic data from China showed a rebound in industrial output and fixed-asset investment, growing faster than expected in January and February, according to a Reuters report. Both steel and iron ore prices perked up as a result. Still, high steel output and stockpiles limited price gains, said the Reuters report.

Also, restrictions on steel output to control pollution in winter months in China have ended, which should see steel output increase. This has a twin effect: higher steel output could weaken steel prices but higher demand for iron ore could lead to firm prices. Since iron ore prices tend to influence steel prices, the net effect remains to be seen.

This interplay matters more for Indian steelmakers in the next few years, since we have become net exporters of steel. The month of February appears to indicate a change in trend, with exports declining by 8.3% over the previous year, according to Joint Plant Committee data. Finished steel output rose by 3.8% during the month but this was due to a 3.5% decline in Tata Steel Ltd’s output, probably explained by a shutdown at its Kalinganagar plant.

Since this is temporary, steel output will increase subsequently and exports will pick up as well, since we will have surplus output.

More importantly, February also saw a healthy increase in India’s steel consumption of 7.4%. Steel consumption growth has trended up in recent months.

If it holds up, the domestic steel industry will be in a solid position, as domestic sales are more remunerative than exports.

The main risk is a slippage in steel prices. That’s why China remains the big factor to watch for, although the US too has gained prominence this year with its 25% import tariff. Indian steel producers seem to be in a relatively good place. All they need is for global prices to remain steady, at the least; otherwise, a fall in prices can undo all the good that is being seen in the domestic market.

Source: LiveMint

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