Why Chinese steel is keeping Indian companies on the edge

Executives at top steel companies highlighted the outsized impact of Chinese steel on their export and domestic prices during their December quarter earnings calls with media and analysts.

How Chinese steel exports shape up in the coming quarters will be a key factor to monitor, they said.

Despite India’s 7.5% import duty and logistics costs, Chinese steel was still 5–10% cheaper than locally produced steel for the better part of FY24, curtailing the ability of Indian steelmakers to raise prices and curbed their margins. At the same time, cheaper steel benefits user industries in consumer durables, automakers and infrastructure and construction companies. Average prices of benchmark hot-rolled coils of steel (HRC), which stood at around ₹57,900 per tonne in September, fell to just over ₹54,000 in February, as per data from SteelMint.

“Our retail sector sales dropped because of higher imports from China and FTA countries in the last quarter," Jayant Acharya, joint managing director of JSW Steel said in a recent interview. “Our imports rose by 16% and our exports fell by 16%, and that impacted basic sentiments and retail."

The Ebitda margin of JSW Steel contracted nearly 57 basis points sequentially during the December quarter to 17.1% as per Mint’s analysis. Ebitda stands for earnings before interest, taxes, depreciation, and amortization. Tata Steel, Jindal Steel and Power and Steel Authority of India reported Ebitda margins of 11.3%, 24.3% and 9.2% during the quarter, as per Mint’s analysis.

Any Chinese stimulus for its infrastructure sector may raise steel prices, said Jayanta Roy, senior vice-president, Icra.

“China’s government is trying to revive the country’s domestic property sector. Any large Chinese stimulus measure in 2024 directed to the property and infrastructure sectors has the potential to improve Chinese domestic steel demand growth prospects, which can have a significant impact on global steel prices if Chinese exports come down as a result of that," Roy said.

User industries say that if Chinese steel prices go up, local prices may rise as well, lifting their input costs.

“Chinese steel that was being imported was very competitive at some point in time. The slowdown in Chinese economy has made sure that the capacities they have are utilized outside of China," R. Shankar Raman, chief financial officer of engineering and construction major Larsen & Toubro said after the company’s earnings release.

However, he added that for most contracts that L&T undertakes today, there are standard price variability clauses linked to key commodity indices, ensuring that commodity cost inflation does not have squeeze margins.

The country’s largest carmaker Maruti Suzuki increased prices in January, attributing it to higher commodity prices, including steel.

“We have announced a price increase in the range of about 0.45%, which will also help (margins). In commodities, steel might show some upward movement," the company’s chief investor relations officer Rahul Bharti said at an analyst call.

Global steel prices fell after China’s weak poor domestic demand prompted it to increase steel exports. Its real estate sector, one of the growth engines of the world’s second largest economy and one of the world’s hungriest consumers of steel, has been in the doldrums after the covid-19 pandemic. China’s real estate sector accounts for around 15% of global steel demand, Icra’s Roy said.

“When the real estate sector in China started facing issues in 2021, the country’s domestic demand growth suffered. In 2023, when there was an excess Chinese steel production, this was directed towards the international markets," Roy explained.

Global demand for steel was also subdued during this period, keeping supply far in excess of demand. The only bright spot for steel demand during this period was India.

“So, a lot of Chinese steel found its way to India. Naturally, in a freely tradable commodity, this arbitrage arising out of cheaper imports exerted pressures on domestic steel prices," Roy said.

The situation has improved considerably since November, when Chinese steel export prices went up slightly, mainly due to higher input costs of iron ore and coking coal, he added.

Going forward, the key factors to monitor will be Chinese government stimulus and revival in the country’s real estate sector, he said.