Steel industry grapples with price pressures as global demand wanes

Weak demand in global markets is a key factor weighing on domestic prices. Respite in the near term appears unlikely as delayed economic recovery and a drop in steel prices in China exacerbate the situation. China’s production strength makes it a key market for the metals industry and the country’s economic developments have a bearing on the sector.

Moreover, there has been a sharp $30-40 per tonne drop in HRC export prices from South Korea and Japan, according to a BNP Paribas Securities India report on 26 March.

“With this sharp decline, Indian domestic HRC prices are at a meaningful ₹4,000 per tonne premium to import prices from these countries," the report said. In effect, this means a further fall in domestic HRC price cannot be ruled out.

Back home, government spending and infrastructure projects may see a slowdown given the upcoming elections, adding more pressure on domestic steel prices.

But there’s a bright spot. The costs of raw materials used in steel production are also falling, thus brightening the margin outlook. The average price of coking coal in March is down by more than 10% month-on-month to $284 per tonne, according to BigMint. Further, the price of another key input–iron ore–is also on a free fall globally.

State-owned iron ore producer NMDC Ltd slashed prices recently by 3-5%. The price of lump ore and fines stand at ₹5,800 per tonne and ₹5,060 per tonne, respectively.

On the back of a sharp fall in global iron ore price, the discount of NMDC price to global price has narrowed to 38% for March 2024 versus an average of about 50%, noted the BNP Paribas report. This indicates the scope of correction in NMDC iron ore prices, the report added.

However, the effect of lower raw materials costs would reflect with a lag. As such, the March quarter (Q4FY24) would be nothing to write home about for Indian steel makers. Sure, volumes would see an uptick helped by seasonality, but lower prices sequentially would impact realizations. Tata Steel Ltd expects realization in its domestic business to drop by about Rs1000 per tonne month-on-month in Q4.

Moreover, the consumption cost of coking coal is likely to be higher. For instance, Jindal Steel and Power Ltd expects coking coal costs to increase by $10-12 per tonne in Q4. “(For Indian steel players), we estimate an Ebitda margin compression of more than ₹1,500 per tonne sequentially," said analysts at JM Financial Institutional Securities in a report on 21 March. Ebitda is earnings before interest, tax, depreciation and amortization.

Meanwhile, the prices of other metals on the London Metal Exchange also paint a grim picture. The price of aluminium has been range bound at $2100-2400 per tonne for many months now.

This is likely to be the situation for a while given that there is enough supply to meet any increase in demand. Further, the elevated cost of production would prevent a significant downfall in the metal’s price. The average price of lead in the March quarter is down by over 2% sequentially.

Clearly, an uptick in global demand is the need of the hour for the metals industry. Though the Nifty Metal index has gained 3.5% in 2024 so far, investors would do well to closely track the extent of the rebound in the Chinese economy.