Steel sector grapples with weak demand, Chinese import, K'taka tax proposal

The domestic steel industry could face several stresses in the near-to-medium term. There is the threat of cheap imports amid weak global demand. A new proposal from the Karnataka government could impose retrospective taxes reaching back to 2005. The July-September quarter (Q2) of financial year 2025 (FY25) was poor with aggregate EBITDA edging towards the negative zone. Following through with capex plans will push up leverage.

 

In November 2024, the per tonne prices of flat steel products, both HRC (hot rolled) and CRC (cold rolled), stayed flat month-on-month (M-o-M) at Rs 48,000 and Rs 55,500, respectively due to weak global prices and higher imports. Long steel product prices improved marginally by 2 per cent M-o-M to Rs 54,600 per tonne. India’s steel demand dropped 4 per cent M-o-M to 12.38 million tonnes (MT), primarily due to a halt in construction activities due to smog.

 

Input costs, however, remained firm in November 2024. Per tonne prices of Iron ore were sustained at Rs 6,350 for lumps and Rs 5,410 for fines, following two consecutive price hikes by NMDC during October 2024. Dull seasonal demand was more than offset by higher export prices. But deteriorating sponge iron and steel market sentiments will restrict serious upside. Premium coking coal prices remained flat M-o-M at $220 per tonne in November 2024 . Australian coking coal prices are likely to be range-bound due to weak Chinese demand.

 

China’s steel demand for the first 10 months of calendar year 2024 (CY24) fell 6 per cent year-on-year (Y-o-Y) to 760 MT-- the lowest in absolute terms since 2018. China’s steel output has risen leading to higher exports with weak local demand. 

 

The Indian steel industry has asked for safeguard duty to be imposed given cheap imports. If such duties are imposed, it would be a structural relief to domestic steel. Given protectionist trade remedy measures by various countries between 2019 and 2023, excess capacity in China, South Korea and Japan and decline in China’s steel consumption, there is a sharp increase of imports. Flat steel imports are up 76 per cent M-o-M in September 2024 and October 2024 while flat steel exports from India dipped 29 per cent. The share of China in India’s steel imports swelled to 27.4 per cent during Sep-Oct 2024 compared to 13 per cent averaged for prior 5-years. Domestic steel prices are at parity with landed cost of Chinese imports and at 3 per cent premium to landed cost from South Korea and Japan.

 

On the basis of the Supreme Court’s (SC) July 25, 2024 order, Karnataka government has proposed additional mineral levies. If the Bill is passed, it could have a varied impact on different players with NMDC worst-affected. But Karnataka is a key ore production state with 15 per cent share of iron, and India’s competitive advantage in steel may be undermined since it would drive up costs and erode margins. The Bill may also be challenged.

 

Net leverages for ratio of net debt to EBITDA of domestic primary-steel makers will hit a five-year high of over 3x this financial year, according to Crisil. Their debt is expected to rise over 25 per cent on capex plans which will lead to aggregated capacity increase of 30 MT by FY27.

 

However, net debt per tonne will remain below the pre-pandemic level so capex may continue, supporting subsequent volume and margin gains. Planned capex is Rs 70,000 crore in FY25 and FY26, with domestic steel demand slated to grow 8-9 per cent this financial year and see a CAGR of 6-8 per cent over the medium term.

 

The capex will lift the debt of domestic primary producers by over Rs 40,000 crore in FY25, to FY20 levels. Net leverage is expected to improve to 2.8-3x next financial year on better steel prices and incremental volume. Volumes may trend upwards in Q3FY25 and working capital needs may be less. But most industry players see weakness persisting into H1FY26 with the global cycle turning only in CY26 or beyond.