The Indian steel industry is facing a slowdown, which is affecting the margins of integrated steelmakers such as Tata Steel and SAIL. These companies own iron ore and coal mines, which helps them earn better margins when demand is high. However, during a slowdown, the fixed costs associated with owning these mines become a burden, leading to a squeeze on margins. In contrast, non-integrated steelmakers such as Jindal Steel and Power Ltd and JSW Steel Ltd, who buy raw materials from third-party suppliers, are better placed to weather the downturn.
Analysts expect the margins of integrated steelmakers to fall more sharply than those of non-integrated players. According to Manav Gogia, an analyst at Yes Securities, the drop in margins will be visible in the second quarter of this fiscal year. Analysts at BigMint and Kotak Institutional Equities also concur that non-integrated players will be better placed amid the ongoing weakness in prices and costs.
The steel industry is a significant contributor to India’s GDP, accounting for nearly 2% of the country’s economic output. The industry is considered the backbone of India’s industrial and economic growth. However, the sector has been facing headwinds due to Chinese steel dumping in India, which has led to a surge in imports and a decline in domestic prices.
The benchmark price for hot-rolled coils has fallen to a four-month low, while the price of rebars has plunged 13% from its previous high in April. The government has imposed a 12% safeguard duty on steel imports to protect the domestic industry. Major steel-using sectors such as automotive and construction are expected to benefit from the price drop, as they will have lower input costs.
JSW Steel and Jindal Steel and Power Ltd are expected to narrow their margin deficit with Tata Steel, which had the highest Ebitda per tonne of the alloy produced last fiscal. The brokerage expects Tata Steel to maintain its margin lead in the industry, but the gap is expected to narrow. Other steelmakers such as JSW and JSPL are also keen on bidding for mines if they are available at a reasonable price.
Overall, the Indian steel industry is facing a challenging environment, with integrated steelmakers facing a squeeze on margins due to the fixed costs associated with owning mines. Non-integrated players are better placed to weather the downturn, and the government’s imposition of safeguard duties on imports is expected to provide some relief to the domestic industry.