The Indian steel industry is on the path of revival, as the government’s infrastructure push has provided a much-needed impetus for a struggling sector. Despite global challenges, this sector is finding its feet and recorded increased production volumes in the first half of FY24.
But problems still shadow Indian steelmakers: a sharp rise in Chinese steel production has put a ceiling on prices for the industry while increasing coke prices are adding to cost concerns. Dilip Oommen, President of the Indian Steel Association and CEO of ArcelorMittal Nippon Steel India stated that, “India faces the highest threat of cheap steel imports flooding its domestic market if action isn't taken in time to curb the import threat.”
Bullish projections for India’s economic growth would help the industry, in the form of a wave that lifts all boats, including steel. Already, infra-spending by the government and rising retail consumption have increased domestic demand. Reflecting this positive trend, the Nifty Metal index rose 20.4% in the past six months, outperforming the broader Nifty 50’s 12% increase.
Election year spending set to boost steel demand in FY24
Amid global challenges, the Indian steel industry stands out as one of the fastest-growing sectors, thanks to government spending on infrastructure. The budgetary allocation for infrastructure rose by 33% to 10 lakh crore in FY24.
India’s finished steel consumption hit a five-year high from April to October. Increased construction activity, as well as higher industrial manufacturing and automobile production, were major drivers. The construction sector, in particular, has grown by 7.9% QoQ in Q2FY24.
This momentum is expected to continue as the country’s incumbent government pushes for election-led infra spending, building bridges, roads and railways that they hope will convince voters to reward them with another term.
Post-elections, however, India's steel consumption is expected to drop. According to Fitch ratings, India’s finished steel consumption for FY24 is estimated to grow by 12% and drop to 9% in FY25.
India’s steel industry set to beat FY24 projections
India’s steel consumption grew by 15% in the first half of FY24, beating the Indian Steel Association’s earlier estimates of 7.5% total growth in FY24. According to the National Steel Policy, India’s per capita steel consumption is expected to increase from 87 kg currently to 158 kg by 2031.
Most of India’s steel consumption is domestic, but China has always loomed large for Indian steel. China controls 55% of the world's production and plays a major role in setting international steel prices.
China’s increased steel exports hit the global market
China has ramped up its steel production in the first half of FY24. However, a slowdown in its own infrastructure and real estate sectors resulted in a stockpile of inventory. This excess steel has been dumped in the international market in search of buyers. China has been dumping nearly 10% of its monthly production volumes in the international market, And its steel exports have been on the higher side for the past three months after moderating between June and July. From January to November 2023, Chinese exports surged by 35.6% to 82.7 million tonnes, the highest in the past five years.
China ramps up steel exports over the past three months
The excess influx of Chinese steel into the international market has caused global steel prices to decline from $670/tonne in March 2023 to $529/tonne in December 2023.
While most of India’s steel production is dedicated to captive consumption, around 5-10% is exported. However, rising domestic consumption and declining steel prices have forced India to increase its steel imports.
India turns net importer amid global market shifts
Over the past three months, India has transitioned to being a net importer of steel. India imported 4.3 million tonnes of finished steel from April to November, an increase of 13.4% YoY. In contrast, exports have dropped by 6.2% to 4 million tonnes during the same period. According to Crisil, India is expected to import around 6 million tonnes by the end of FY24.
India becomes net importer of steel over the past three months
Domestic manufacturers have been pushing for the government to raise taxes on imported steel. However, the Centre has been reluctant, considering the impact it could have on the manufacturing and construction sectors. Nearly 23% of domestic steel is consumed by the automobile sector.
However recent price trends suggest that domestic steel prices are now lower than international prices, which could limit steel imports going forward.
Domestic steel prices underperform international steel prices
The export market, previously a profitable avenue for China, has been affected by the global slowdown, impacting steel consumption. The lower steel prices in the international market have also adversely affected the profitability of Chinese manufacturers. In response, China reduced its production from a peak of 95.6 million tonnes in March 2023 to roughly 76 million tonnes by the end of November 2023.
India ramps up steel production as China slows down
In contrast, Indian steel manufacturers have ramped up their production. India’s steel output increased from 10.4 million tonnes in April 2023 to 12.1 million tonnes in October 2023. This reversal in trend is reflected in the pricing trends.
Historically trading at a premium compared to international prices, domestic steel prices have been at a discount since October 2023. This discount further widened to 5.7% by December.
Indian steel priced below international rates since November 2023
Also, China’s recent announcement of a $137 billion capital infusion into urban village renovation and affordable housing programs is expected to absorb the excess steel production there. This will result in lower steel supply in the international market and influence international prices.
Higher fuel costs to squeeze margins
In India, nearly 78% of steel production relies on blast furnaces, which use thermal coal. This dependence has made India the largest importer of coking coal, with the steel sector being its major consumer. Fuel costs account for nearly 40% of the total production cost for steel. Any increase in coking coal prices will result in margin contraction.
Coking coal prices rise above $300 for the first time in 10 months
Coking coal prices have seen an uptrend over the past six months, consistently trading above $300 per tonne due to increased demand. These prices are expected to remain within this range for a while. Lower domestic prices and increased coal prices might squeeze margins for steel manufacturers.
Indian manufacturers to see volume-led growth with near-term margin moderation
Indian firms like JSW Steel are set to benefit from domestic demand, while others like Tata Steel are facing difficulties in volume uptake in international markets. Recent trends suggest JSW Steel has depleted its low-cost coking coal inventory. Despite price hikes in Q3, manufacturers have been offering discounts to maintain volume levels. An increase in iron ore prices is expected to put more pressure on margins due to rising input costs. Tata Steel has also taken insurance cover for pension liabilities amid its long-standing tussle with labor unions in the UK.
Leading Indian manufacturers are focusing on capacity expansion to meet domestic demand. The sector is also consolidating, with larger players acquiring profitable smaller units. JSW Steel is planning to increase its capacity from 28 million tonnes (MT) to 37 MT by next year and 50 MT within the next three years. Similarly, Tata Steel aims to expand its capacity in India from 21.6 MT to 40 MT by 2030. However, these expansion plans are likely to add more debt to already highly leveraged firms.
The Indian steel industry is set to see a volume uptick in the near term. However, lower prices, increased fuel costs, and higher iron ore prices might impact margins.
On the brighter side, a cut in Chinese production and increased domestic consumption of China (due to its renewed infra push) could strengthen international prices. This could help Indian millers allocate a portion of their production for exports and realize higher margins