According to the Metals report of Motilal Oswal Financial Services Limited (MOFSL), Steel demand, especially in the TMT market, is likely to remain weak in the near term. There was a shift in demand pattern in the Individual Home Builder (IHB) segment where preference was given to branded/primary TMT vis-à-vis secondary, while projects have started buying secondary steel to lower their costs.
Secondary steel producers are gaining entry into government projects, CPWD, PWD, Railways, NHAI and other government departments subject to quality checks that need to be monitored with stringency. Replacement of TMT with fiber-reinforced polymer rods has not gained traction with customers.
Earlier Trends have suggested that steel demand in eastern India has been quite strong during Nov-May, before the onset of monsoon, due to the peak construction season that starts after monsoon and ends with the pre-monsoon showers, during June. As a result, the demand starts weakening during the second half of May in anticipation of the start of the monsoon season from 1st June.
However, this time, demand has weakened ahead of the usual seasonal downturn due to high steel prices and weak Chinese economy that reflects a possible slump in steel prices. The downturn is reflected in higher inventory carried by most of the players and reduced prices, especially in the long products segment. Prices of secondary TMT have corrected INR1,500-2,000/t in the last week. MOFSL expects the demand to trend down through the end of monsoon before picking up post Diwali / Chhat pooja festivals, with intermittent recovery in pockets.
A shift in demand pattern was highlighted by TMT producers, where the IHB segment was shifting to primary/branded steel. There is a marked shift in approach from being cost conscious to quality conscious in the IHB segment. Steel cost for an IHB for a 1-2 floor building is around 15-20% of its total cost. Even if there is a gap of 10% between primary/branded steel producer and secondary, the overall increase in cost of the building is only 1.5-2% which is negligible considering the perceived safety and comfort with branded steel.
Fiber reinforced polymer (FRP) bars or Glass fiber reinforced polymer (GFRP) bars’ penetration in the Indian construction market has not been impressive. Despite a strong rally in the steel prices, both in the longs and flats, the FRP and GFRP have not been able to effectively replace the traditional TMT (either primary or secondary) until now.
While there are advantages of using the FRP/GFRP bars that include no thermal, magnetic conductivity and are high corrosion resistance, the FRP/GFRP bars are not as elastic as the traditional TMT bars, which make them difficult for use in most of the construction applications. Hence, further innovation in the FRP products is required to bridge this gap. Until the innovation on the elasticity of FRPs happen, MOFSL sees extremely limited substitution possibilities for the FRPs.
Coupled with the slowdown in China, where Covid-related lockdowns have impacted the demand for steel adversely while production continues unabated and even higher, the risk of higher exports from China and consequent reducing steel prices in the international market remain high. Steel prices in the Chinese exports markets have corrected by over USD100/t in the last month itself.
A few players continued to highlight that the demand remains robust, though lower compared with Feb-Mar’22 levels. The ‘pull factor’ is now missing and customers are no longer re-stocking, but buying largely on a need basis with limited inventory. Most of the players are looking at strengthening their sales and distribution networks and offering discounts to ensure the material is purchased by the customers on time to avoid over stocking. MOFSL believes steel prices are likely to continue to correct as monsoon draws nearer and demand continues to weaken especially in the construction segment.
