Steel prices dip to the lowest in 3 years, hurt by Chinese oversupply

Steel prices have failed to recover after the general elections, contrary to industry expectations, and have continued their downtrend, potentially hurting profitability of domestic steelmakers. These companies are scrambling to rein in their costs to protect margins amidst a large capex cycle. Most large Indian steelmakers are adding capacity on expectations of demand growth led by New Delhi’s infrastructure and housing push.

Meanwhile, downstream industries that are consumers of steel, like real estate, automobiles and infrastructure, will continue to benefit from the lower input costs, they said.

Prices of benchmark hot-rolled coils (HRC) of steel averaged just under ₹52,300 per tonne in July, the lowest since December 2020, according to data from market research and consulting firm BigMint. The prices continue to fall and are trading at around ₹51,000 per tonne currently, the analysts said.

“A significant slowdown in China's economy has led to a correction in global steel prices, with Chinese export prices hitting a four-year low," according to Dhruv Goel, the chief executive of BigMint.

China hosts half of the world’s annual 2-billion-tonne steelmaking capacity and until recently had a similar share of steel consumption too. But a weakness in China’s real estate market has left Chinese manufacturers with overcapacity. They are selling this metal in India and elsewhere at a price below their production costs to keep their mills running, Indian steelmakers allege.

“Chinese domestic demand is muted owing to weakness in its property sector," said Aditya Welekar, senior research analyst, Axis Securities.

There could be more pain in store, Welekar warned, if reports are to be believed that China is shifting its policy focus from real estate and infrastructure to consumption, technology and high-tech industries.

“While we might be around the bottom for prices, given that Chinese mills are incurring losses at the current HRC rates, any significant price increase will likely depend on whether the Chinese government introduces a stimulus to boost domestic demand or cuts down its steel production," Welekar added.

A surge in imports

The lower prices of steel in international markets have led to a surge in imports from both Vietnam and China into the Indian market. According to provisional data for July 2024 from BigMint, India continued to remain a net importer of the alloy, importing 0.65 million tonnes during the month. Exports stood at 0.45 million tonnes.

“The active presence of Chinese steel in the international market has made Indian steel exports uncompetitive in many regions, resulting in a substantial drop in export volumes," Goel pointed out. This has impacted the pricing dynamics in the Indian steel industry.

China has been exporting 8-10 million tonnes of steel every month this year, Welekar said.

The supply-demand dynamic in India is worsening as new domestic manufacturing capacity becomes operational.

"While steel prices have gone below December 2020 levels, input costs are considerably higher than what they were back then," said Ranjan Dhar, director and vice-president, sales & marketing, AM/NS India.

"This is not sustainable and will push steel companies into losses. The steel industry has come forward and front-loaded a large capex. But this investment needs to remain viable. If this situation persists, it will also have a ripple-effect on the government's employment-boosting efforts," he said.

However, what might be a bane for one is proving to be a boon for the other. Lower steel prices are likely to help the margins of consumer industries like automobiles and construction, experts said.

“Softness in steel prices will improve the margins of auto and other industries that consume steel as raw materials," Welekar noted.

For instance, at leading commercial vehicles maker Ashok Leyland, material costs as a share of revenue declined by 1.5 percentage points sequentially during the April-June quarter at 72.2%.

"Steel prices remain softer, and our efforts on cost saving continue with even more vigour, Dheeraj Hinduja, the executive chair of Ashok Leyland, told analysts in a recent earnings call.

Input costs

But all is not lost, as experts believe that with falling prices of raw materials like coal and iron ore, Indian steel manufacturers might be able to limit the margin erosion. Prices of coking coal - a key input for steelmaking - are currently hovering around $216-220/ tonne in the second quarter (July-September), compared to an average $260/tonne in the first quarter of FY25.

Similarly, iron ore prices are also trading lower. On Wednesday, National Mineral Development Corporation (NMDC) cut iron ore fines and lumps prices by ₹600 and ₹500 per tonne, respectively, to ₹4,510 and ₹5,550. This is a second consecutive month of price cuts by the country’s leading miner, resulting in about 20% lower prices.

The fall in prices has been advantageous for Indian mills but “not commensurate with the fall in steel prices," Weleker said.

The incremental benefit of lower iron ore prices will be limited for companies having captive mines, like Tata Steel.