Domestic steel prices are expected to more or less hold up this fiscal at Rs 59,000 per tonne (flat steel) and Rs 56,000 per tonne (long steel) despite a slowing global economy. Smoldering domestic demand, rising coking coal prices and production-related dynamics in China, the world’s largest steel maker, are likely to prevent the slide.

Domestic demand is poised to grow in double digits for the third consecutive year, buoyed by pre-election spending this fiscal. In the first five months, it had already risen 13%. Frontloading of central government capital expenditure (capex) could imply demand tapers in the second half. Still, over the entire fiscal, we expect demand to grow 10-12% on-year. This would come on top of 11.4% and 13.4% growth, respectively, in fiscals 2022 and 2023.

Over April-July 2023, the central government had already utilised ~32% of its total budgeted capex on big ticket infrastructure projects, as against ~26% on average in the corresponding period of the past four fiscals. An unprecedented ~30% increase in infrastructure capex was announced in this year’s budget. Though ambitious, this target is unlikely to be missed, given the government’s track record of achieving 98% of budgeted capex in the past four fiscals despite the pandemic and pressure on revenue receipts.

States have followed suit. Spending by top 17 states that account for ~90% of total state capex indicate an 80% surge in the first quarter, on-year. Though on a low base, it signals an improving trend. Upcoming elections in Chhattisgarh, Telangana, Madhya Pradesh, Rajasthan, Andhra Pradesh and Odisha that account for ~23% of total state capex, is also expected to buoy demand.

Says Koustav Mazumdar, Associate Director- Research, CRISIL Market Intelligence and Analytics, “The infrastructure segment accounts for ~30% of total steel consumption in India. In the past five fiscals, infrastructure capex (central and state combined) logged an 18% compound annual growth rate. And first-quarter growth of 60-65% on-year this fiscal is way above past trends. With annual growth in infra capex (central + states) expected at ~25% this fiscal, we believe domestic steel demand has great support. Private capex revival and steady auto demand will further drive growth. All this, amid fluctuating global raw material prices, will keep flat steel prices ~50% higher than pre-pandemic levels on average this fiscal, too.”

To be sure, domestic steel prices have corrected since April 2023, in line with cooling raw material prices of domestic iron ore and global coking coal. Between April and July, flat steel prices corrected by Rs 4,500-5,000 per tonne and long steel prices by Rs 6,500-7,000 per tonne.

However, coking coal prices started climbing again in August. Australian coking coal prices rose to ~$280 per tonne in the second week of September from ~$230 per tonne in July. Closure of several mines in China post an accident in August worsened an already tight supply situation, leading to a rise in Chinese imports and driving coking coal prices higher. Chinese coking coal imports had risen ~50% on-year in January-August 2023.

Higher coking coal prices, combined with robust domestic demand, have worked up Indian steel prices over the past two months. While flat steel (hot rolled coil, or HRC) prices increased Rs 500-750 per tonne in the first week of August, they further spiked Rs 1,000-1,500 per tonne in early September. Long steel, on the other hand has seen multiple rounds of hikes since mid-August totalling Rs 3,500-4,500 per tonne, amid supply shortage due to pre-planned maintenance activities.

Domestic prices will also be supported from rebounding prices in China and Japan. Far-east Asia steel prices rose $15-25 per tonne over the past two weeks, owing to an increase in coking coal prices and a fall in steel production in China. Major blast furnaces in China’s Hebei province, which account for 21-23% of China’s total steel production, have been asked to cut sinter production by upwards of 20% in September. This will result in weaker crude steel production ahead of the prime construction season. A strict implementation of the directive will push prices again above $600 levels.

Chinese steel mills are also anticipated to cut production to comply with policy. Unlike previous years, the government has made no formal announcements on production caps, but taken steps at the province level to curb production. Speculation is also rife about a formal guideline to be issued in October stipulating production cuts. If that happens, it will augur well for global prices. In fact, the world’s largest steel producer Bao Steel has already announced it would keep production flat for the year, which amounts to toeing the policy line of production cuts.

Says Sachidanand Choubey, Manager - Research, CRISIL Market Intelligence and Analytics, “Flat steel prices should remain elevated at ~Rs 59,000 per tonne in fiscal 2024, dipping only marginally by 2-4% on-year amid better demand prospects and rising coking coal prices. Prices are expected to average at ~60,000 per tonne in the second half of this fiscal as against Rs 58,300-58,500 per tonne in the first half. Long steel prices, however, might see a sharper dip of 5-6% to Rs 56,000 per tonne despite robust demand, on the back of cooling input costs, especially of thermal coal.”

China’s policy measures, especially with respect to production cuts, bear watching. If China caps total production at last year’s 1.02 billion, Chinese mills will have to cut production by ~17% from July-August 2023 levels. This will reduce China’s exports from here, and drive global flat steel prices higher, in turn benefitting large Indian integrated players that exported 10-15% of their flat produce as of last fiscal.