Pricing weakness likely to weigh on Indian steel companies stocks

Steel companies are witnessing margin pressures in Q2FY25 and this may persist until China sees growth recovery. For some categories of steel prices are at multi-year lows. There's a partial offset since ore prices have dipped, and coal prices are also down.

Nevertheless, investors should brace for bearish news. China's slow economy means a glut in cheap steel exports. Indian steel majors continue to expand capacity. While this seeks to exploit higher long-term domestic demand, it will add to margin pressures until realisations improve.

In Q1FY25, Tata Steel and JSW Steel posted flat operating profit margins as higher volumes and lower input prices compensated for low steel prices. But the Steel Authority of India (SAIL) saw a margin contraction. NMDC’s lower production helped with margin expansion due to lower royalty expenses. In the steel pipes space, Surya Roshni (SYR) recorded strong margins due to a better mix of steel and lighting segments. Apollo Tubes posted record volumes but margins were flat.

All steel companies are ramping up volumes with capacity expansion plans. JSW Steel and Tata Steel are aiming for 40-50 million tonnes (MT) of steel capacity each by 2030. NMDC is also targeting the 100 MT capacity mark by 2030. In the steel pipe segment, Apollo Tube is expanding to the 5 MT mark while SYR announced fresh capex to augment capacities from 1.2 MT to 2 MT in two years.

The domestic demand outlook is long-term positive. India imported 1.9 MT of steel in Q1FY25, which was up 67 per cent Y-o-Y (down 11 per cent Q-o-Q), and exported 1.5 MT. About 85 per cent of imports were from China, South Korea, and Japan. Cheap imports are likely to persist till September at least.

Crude steel production in India rose 4 per cent year-on-year (Y-o-Y) for the January-June period but dropped 2 percent month-on-month (M-o-M) in June to 12.1 MT. During April-June 2024, finished steel imports to India rose 35 per cent Y-o-Y to 1.9 MT while exports from India fell 38 per cent Y-o-Y to 1.5 MT.

In July, prices of hot rolled coil (HRC) in China fell 3 per cent M-o-M, with 5 per cent M-o-M fall in Japan HRC and 9 per cent fall M-o-M in US HRC.  In India, primary long product prices declined 8 per cent M-o-M in July after falling 2 per cent M-o-M in June. From August till now, primary long product prices decreased by 5 per cent M-o-M, while HRC prices are down 2 per cent.

In July, iron ore prices in Australia and China also fell 1 per cent M-o-M each. From August till date, iron ore prices in China and Australia are down another 3 per cent M-o-M. In India, NMDC took a price cut of Rs 600/tonne (lumps) and Rs 500/tonne (fines) in August, after a cut of Rs 500/tonne each at the end of June. On average, domestic HRC and rebar prices have corrected by 6-12 per cent in Q2FY25.

Anti-dumping duty investigations by the European Union against several countries, including India, highlight growing trends of protectionism.  Indian HRC capacity, which was 51 MT in CY21, is likely to rise to 70 MT by CY25. As capacity expands, more protectionism may drag down export opportunities and domestic prices.

Domestic steel prices are down 2-3 per cent M-o-M in August 2024. Regional prices, led by China, have seen a 6-7 per cent M-o-M correction in August 2024. Domestic prices are at a premium of over 5 per cent to import parity so there's a downside. Non-integrated units like Jindal Steel and Power and JSW Steel will be better-off due to sourcing cheap ore. But the industry will struggle until the cycle turns.