Global steel prices have seen a spectacular run since the second half of FY21, especially in the US and Europe. The HRC (hot rolled coil) prices in the US have spiked up from the levels of around $550 per tonne to around $1,500 per tonne since September 2020. Similarly, the HRC prices in Europe have spiked up from $500 per tonne to $1,050 per tonne.
This astonishing rally was primarily driven by the supply-demand mismatch created in the market post the first COVID-19 wave. While the steel mills took time to resume operations, bounce back in demand was faster-than-expected. It created a demand-supply mismatch across the globe. The container crisis further impacted the global supply chain. It spiked up the delivery times. Shortage of supply against the high demand led the steel prices to the decadal highs during this period.
However, the world has moved on since then, and the situation of supply gut has eased considerably. It can be further confirmed from April's preliminary data. The delivery time has eased from March levels.
With supply chains getting restored, the demand-supply mismatch is also likely to abate soon. It puts further rally in steel prices at risk.
Signals from China
Apart from supply chain restoration, multiple risks have emerged from China. It could put further price movement of steel at risk.
The Chinese government has recently expressed concerns over the higher commodity prices. And warned traders against taking speculative positions and hoarding. It resulted in a steep fall in the futures of iron ore and steel in China. And, if the Chinese government opts to take action, it could put a firm check on surging commodity prices.
Global Supply Chain Restoring Fast
The Chinese government has taken extensive steps to curb exports and increase imports to strengthen its domestic industry. It has removed VAT (value-added tax) rebates on the export of 146 steel products from May 2021, along with cutting import duty on pig iron, crude steel, and steel scraps. However, it is unlikely to create a similar supply gut in the international market as last year.
Ex-China steel production has been inching up fast. And, it's April daily run-rate was just 4 percent shy of the pre-Covid peak. Hence, there is a remote possibility of steel prices getting impacted despite the withdrawal of Chinese steel from the international market.
Global steel production is inching up despite the muted activity levels in India, the second-largest producer of steel, due to the second COVID-19 wave. And, it is likely to pick up further once Indian mills increase their capacity utilisation levels.
With the supply of steel increasing in the international market, it would eventually lead to a moderation in steel prices shortly.
Indian Steel Prices Are at Risk Too
The domestic steel prices continue to trade at a discount when compared to the international prices. It gives them further room to increase prices. Indian steel manufacturers have utilised the situation to their advantage and taken a significant price hike over the last quarter. With that, discount levels have eroded significantly. Further, with improving global supply, global prices are likely to moderate in the coming quarters, reducing the chances of Indian steelmakers' need to take fresh price hikes.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.