India’s 8.4% GDP growth in Q4 2023, and projections of about 7% in FY25, signal a promising era for the steel sector, which has a crucial role in infrastructure and manufacturing. The growth can give the struggling steel industry a much-needed boost. So far, election-related spending and increased production in the industrial and auto have helped steel manufacturers.
Despite the global economic slowdown, parts of Europe and Africa are seeing a recovery in industrial activity. India hit an 18-month high in exports in January 2024, primarily to European markets. The export-led growth and increase in domestic consumption have helped Nifty Metal outperform the broader Nifty 50 by 5.2%, with a 12.4% increase.
However, the Indian steel industry’s volume growth faces challenges from various macro factors. Increased Chinese exports, falling steel prices, moderation in domestic consumption, and rising fuel costs are set to squeeze margins in the near term.
Government spending boosts steel consumption
The government has been courting voters aggressively in the lead-up to the Lok Sabha election, with very visible spending on infrastructure over the past two quarters. India’s 9MFY24 steel consumption increased by 14.8% YoY to 100 million tonnes (MT), backed by growth in real estate and infrastructure projects. This figure is expected to surpass 129 MT by the end of FY24.
In the budget outlay for FY25, the government has raised infrastructure capex by 11.1% to 11.1 lakh crore. However, this interim budget will only be finalized post-elections in June.
India’s steel industry set to beat FY24 projections
ICRA predicts a slowdown in infrastructure activities as elections approach – this is already visible in the lower consumption numbers in January and December. In FY25, the steel industry is expected to grow around 7-8%, a marked slowdown from growth of 12-13% in FY24.
Chinese imports threaten India’s steelmakers
China accounts for nearly 54% of the world’s steel production and significantly influences prices. Its real estate sector, which consumes about 15% of the world’s steel, hasn’t recovered as expected.
The response to the Chinese government’s infrastructure stimulus has been lukewarm. As a result, China reduced its steel production until December 2023 but resumed normal production levels in January 2024.
India ramps up steel production as China slows down
In India, rising domestic demand pushed manufacturers to increase their capacity utilization. India’s capacity utilization for the steel industry stands at around 82% for 2023, up from 78% in 2022. Most domestic listed players have reported capacity utilization rates of over 90%.
Chinese steel imports hurt domestic pricing
Since October 2023, the dumping of cheap Chinese steel into the Indian market is putting pressure on Indian steelmakers, and hurting prices. According to TV Narendran, MD & CEO of Tata Steel, “Stability in China is essential. Either they cut production or reduce exports because the prices they are selling at are highly unsustainable for the industry. Even the Chinese steel industry is not making money at these levels.”
Global steel prices hit by rising steel exports from China
The influx of Chinese steel has led to a sharp drop in international steel prices, from $670/tonne in March 2023 to $550/tonne in February 2024. China has moderated its exports to 7.7-8 MT per month to keep prices between $550-$570 per tonne. But India’s growth amid a global slowdown in steel consumption has seen China, South Korea and Taiwan target it with cheaper steel.
With this influx, India, which has recorded a 16% increase in steel consumption, faced a drop in domestic prices. India’s automotive sector is a major importer of steel, accounting for nearly 33% of India’s steel imports. Rising ore and power costs have, in the meantime, squeezed the margins of Indian millers. They're now demanding an 8-12% tax on imported Chinese steel.
Indian steel is trading below international rates since November 2023
Indian steel prices are currently trading $40 below international rates. Indian manufacturers are as a result, increasing exports. Indian exports hit an 18-month high of 1.1 MT in January 2024.
India becomes a net exporter of steel over the past two months
Rising demand from the European Union, which constitutes nearly 67% of India's steel exports, and higher international prices are expected to help the profitability of steel manufacturers in Q4FY24.
Rising input costs squeeze margins
Steel mills saw margin pressure in Q3FY24, due to rising coking coal prices, which rose around $30 per tonne. These prices are expected to increase further by $15-20 in Q4FY24 and stabilize at around $330 per tonne in the near term.
Coking coal prices trade above $300 for the past two months
Volatile coking coal supplies from Australia (which accounts for 60% of imports) have pushed prices up. Indian manufacturers are now seeking alternative sources in the US, Russia, Canada and Mozambique.
Iron ore prices are also on the rise, driven by increased exports of low-grade ore to China. To combat rising input costs, companies like JSW Steel plan to boost their captive mining to 50% by FY26 from the current 33%. Additionally, Indian manufacturers have taken price hikes in the domestic market.
Profitability for steel players remain above Q3FY23 levels
Despite these challenges, most listed players reported a YoY increase in EBITDA per tonne, with an average margin growth of 28.5%. Tata Steel and Jindal Steel & Power saw the highest growth due to low-cost inventory destocking. SAIL faced margin pressures from lower-priced long-term contracts with Indian railways, while JSW Steel’s margins were affected by a drop in domestic retail volumes (down by 22% QoQ) and rising input costs.
Domestic steel manufacturers' margins will likely remain under pressure for now. Exports are the silver lining here, as the sector weathers the impact of cheaper Chinese imports, rising ore and coking coal costs, and potential softening in domestic demand in FY25.