Steel Industry Outlook during Russia-Ukraine war

The prices of coking coal, iron ore, and steel have sharp movement amid the Russia-Ukraine war, as Russia and Ukraine are large exporters of these commodities. Domestic steel price hikes, so far, are insufficient to cover cost inflation, however, the consumption lag suggests higher margins in the 4th Quarter.

After Australia and USA, Russia is the third-largest exporter of coking coal with approx. 11% of coal exports. Russia exports 30-32 mn tons of coking coal annually, ~14% of the seaborne market. 

Ukraine and Russia are some of the larger suppliers to the global steel supply chain exporting finished steel, semis, and raw materials – coking coal and iron ore.

Russia and Ukraine, together, produce ~100 mn tons of steel annually and export ~37 mn tons which are 8-9% of global net trade. In CY2021, Ukraine exported 40 mn tons of high-grade iron ore and pellets whereas Russia exported ~29 mn tons of iron ore.

Together, a 100 mn tons of iron ore supply, adjusting for quality, is at risk, similar to the impact of Vale’s dam accident in 2019. In the medium-term, in case of ongoing geopolitical disputes, the trade flows would eventually redirect with more Russian volumes diverted from Europe to Asia. 

Steel prices are gradually increasing with cost inflation Europe being the key export market for Russia, the steel supply chain in Europe faces the highest disruption risk.

Steel prices across India, China, and Europe have increased by 10-15% in the past month, led by Europe. However, the recent surge of Covid cases in China and related lockdowns has started reversing some gains.

In India, HRC (Hot rolled coil steel) prices have increased to Rs.75,800/ton, up by 16% CYTD22 whereas rebar (reinforcing bar steel)  prices have increased to Rs.72,500/ton, up by 34% CYTD22.

With disruptions in trade flows, the export market for Indian mills has improved and export prices have increased to $864/ton FoB India, up by 20% CYTD22. Steel raw material cost inflation has outperformed steel prices so far.
 

Coking coal faces the maximum supply risk and prices have surged to $670/ton, up by 88% CYTD. Seaborne iron ore prices increased to $145/ton, up by 18% CYTD22. NMDC recently hiked fines prices.

The steel price hikes do not cover the expected increase in costs as per spot prices. However, given the 30-60 days of consumption lag, the recent surge in costs would hit companies in the first quarter of FY23 whereas price hikes should result in stronger margins in 4QFY22E.

The current high level of steel prices would lead to a decrease in demand in the domestic market part of which should be offset by higher exports by Indian mills. The extent of disruption in supply-demand remains unclear and a sharp downside in costs-prices in case of a positive surprise around de-escalation is expected. 

Indian Outlook: 

1) Indian Steel production increased 7% YoY in February 2022. 

2) Steel consumption declined to 4% YoY in February 2022 in India.

3) Steel exports increased 76% YoY in February 2022. 

4) Steel imports declined 10% YoY in February 2022. 

5) India's net exports increased mom in February 2022.

6) Domestic steel inventory declined marginally mom in February 2022