JPMorgan: Steel June data confirms demand growth essentially coming from exports; Import substitution helping producers in weak market

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Steel
June data confirms demand growth essentially coming
from exports; Import substitution helping producers in
weak market


 June data shows consumption growth essentially coming from EXPORT
INCREASE: As has been the trend over the last few months across materials,
Indian steel consumption (apparent) stood at 0.9% y/y in June (in April
and May it stood at 1.9/1.8% y/y). However, this is headline steel
consumption, which also takes into account the net of import/export
balance. Continuing the trend over the last few months, imports declined
sharply, while exports increased materially. In June, India turned a very modest
net steel exporter. We believe the very sharp movement in the net import
numbers suggests that whatever modest apparent consumption growth we are
currently seeing is coming from increase in exports. Apparent consumption
increased by 0.1MT in June, while exports increased by 0.2MT, implying that
actual domestic demand declined. For the quarter of April-June, apparent
consumption increased by 0.3MT, while exports increased by 0.5MT, implying
domestic demand declined y/y for the quarter
 Sharp decline in imports, a silver lining for Indian steel producers, but
explains why prices did not move up: Indian steel imports declined sharply in
June (down 56% y/y, -0.6MT) and for the April-June quarter imports declined
by 1.5MT (38%). We believe this sharp decline has been supportive for Indian
steel producers. Steel production increased in June by 14% (+0.8MT) and for
the April-June quarter it increased by 1.3MT (+8% y/y). Import substitution in
our view has been helpful for the Indian steel producers to sell volumes. We
had highlighted this possibility in our report ('Analyzing steel export-import
data highlights no easy way out from FLATS over capacity' published on 22-
Jun-11). However, import substitution would require lower prices (moving
to quasi export parity from import parity) ad this is what has happened
over the last 3 months, with domestic flat product prices lower than import
parity prices. Not surprisingly media reports in the metals press (MB, SBB)
have indicated that mills would keep prices unchanged in July.
 Inventory situation has not worsened, but has neither eased: Given the
increase in finished steel production, compared to apparent steel
consumption on a m/m basis, we believe there is some increase in system
inventories, though not by a large amount. Inventories in our view,
remain relatively high, though reducing imports have some what eased
the situation
 Demand weakness- More in FLATS compared to LONGS: While June data
is not yet out, analyzing the April+May data indicates, sharp decline in
FLAT steel demand particularly in HR Coils, while long steel demand is
still in positive territory. We believe some of the HR Coil demand
decline is driven by de-stocking. The differing demand trajectories of
FLAT and LONGS is reflected in pricing, with LONG product prices
increasing in April and May while FLAT products had discounts