Making Sense of India's Steel Prices
Last year in March 2020, when the world became afflicted by the new virus, traders dealing in commodities knew they were in for a difficult time. As these commodities are governed by the supreme forces of demand and supply, demand was close to nil due to the Central Government-imposed lockdown in India, which led the prices of commodities to fall to multi-year lows. Various prominent economists speculated about a slow-recovery, some predicted a short-term V-shaped recovery, but traders were sceptical as to what lay ahead of them.
In May, 2020, the prices of steel increased but were restricted to a paltry bracket of ₹3000 – ₹ 4000/- per tonne. The main reason for this were the high inventory levels maintained by the stockists as well as industrialists. Suppose, you have a warehouse and let’s suppose you’ve 100 tonnes of finished steel @ ₹35,000 per tonne, which means that unless you’re finished with 80% of your stock, you won’t order more. So essentially the prices won’t increase by a higher level, unless the stock is about to end. This is exactly what happened, and therefore, prices remained low.
However, the stock started to deplete at a tremendous rate, when India started to open up, owing to the pent-up demand, which led the traders to scramble for iron ore as well as finished steel, hence shooting up the prices. Iron-ore, the primary raw material of finished steel, was scantily available, due to most of the iron ores being closed because of the economic disruptions. Steadily, mines started operating, but it was a phased-opening. On the backdrop of a robust demand domestically, this furthered the upward pressure on the prices.
Interestingly, even China imported a record-high of 1.9 million tonnes during the first half of 2020-21. In contrast, in the same period of the previous year, China had merely imported 2,500 tonnes from India. This was essential because most of the Chinese steel firms use the blast furnace, which shouldn’t be turned off unless it is being shut down for the good. As the show must go on, China didn’t cease its infrastructure operations, rather it turned into an importer of India’s low grade iron ore.
More intriguingly, this is the first time that India has turned into a net exporter of iron ore in a few years. India was literally exporting 69% of semi-finished steel and 28% of finished steel between April and August. Such heavy exporting activity exerted an even greater pressure on demand when the supply side was in shambles, making it another reason for the price growth from June to December 2020.
When things started to normalise in terms of easy availability of raw materials and demand scaled down to a normal level, stockists thought that prices would wane in the near future, but let’s wait and read!
The aforementioned story is a classic case of a robust demand but scanty supply. But the story can’t be so straightforward: China has been the supremist steel player, not only in terms of production but also in terms of consumption. Therefore, any slow-down in the Chinese steel sector is reverberated all across the world. China, for quite some time, has been focusing on curbing pollution, and as steel mills heavily contribute to the pollution, there have been certain limitations to the production done by these ‘zombie enterprises.’
This campaign was started by China in 2019, and though the emissions control goal wasn’t achieved in that year, the government has become stringent on production curbs since late 2020’s. Now, we can understand why India turned into a net exporter, because when there are production curbs in China, someone had to fulfil the demand, and hence India stepped in.
Talking about India, demand was really strong and on top of that, major steel producers were also exporting a lion’s share of their produce to China. When an investor thinks about all these macro and micro level developments, one can certainly understand that the steel players are going to be benefitted immensely by these developments.
As stock prices discount future earnings, they took a similar course of action this time as well. Major beneficiaries like JSW, SAIL, TATA STEEL, JSPL, to name a few have been on a bull run since November, 2020, and share prices have increased by up to 75%. Therefore, we can easily infer that the steel sector has been in for a rosy ride. But after a bright day, we certainly have a short gloomy period, and so did the steel industry.
Steel prices had skyrocketed, and this caused a major impediment for the Chinese government to continue working on a plethora of infrastructure projects, and hence the administration stepped in. In the month of May, the Chinese Government intervened and started imposing heavy fines on people trying to hike up the prices. This made the investors lose confidence in the industry and the Iron Ore Futures fell north of 16% in a span of two weeks. Though this has proved to be a slight hiccup to the Indian steel Industry, with prices falling to about ₹4,000/- per tonne from the peak.
But stalwarts of the industry are pretty optimistic about the Indian steel prices, because the current prices are still on discount, if compared with the global prices, and thereby provides some leeway for prices to increase.
What lies ahead of us is certainly hazy, like the current weather, but we can only sip our teas and hobble on our samosas, until China comes up with another development with regards to the steel industry.
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