In today’s Finshots, we look at the recent slump in the steel sector and explore what it could reveal about the broader economy and markets.

The Story

Stay with us for a moment as we break down some numbers that explain the current chaos in the steel market, and why it’s a pivotal moment for India.

We’ll start with China.

It’s been the world’s biggest steel producer for years, churning out over 1,000 million tonnes (MT) of crude steel in 2023 alone. That’s more than half of the world’s total steel production. Impressive, right?

It doesn’t stop there. China also exported more than double the steel of its closest competitor, Japan, shipping a massive 94 MT of steel last year.

But here’s the real kicker. Most of China’s steel is sold at a loss. That’s right. China is willing to lose money by dumping cheap steel on the global market, pricing it below the cost of production. Why? Because it’s more important to keep their factories running and maintain global dominance in the steel market than to chase short-term profits. This isn’t a new trick either. Chinese mills have been exporting steel at a loss since 2015, when they sold at a loss of up to $32 per tonne just to keep their operations afloat.¹

Now, let’s bring this back to India. In 2024, India shockingly turned into a net importer of steel. Imports surged 25% between April and August, with over 40% of those imports coming from—you guessed it—China.² In fact, in July alone, Chinese steel accounted for over 70% of India’s total steel imports, the highest it’s been in seven years.

So, what does all this tell us?

Well, for starters, China’s dumping of cheap steel is hitting Indian steelmakers hard. It’s driving down prices, squeezing profit margins, and putting pressure on steel stocks.

Indian steel prices have nosedived to three-year lows. Hot-rolled coil prices have dropped to around ₹51,000 per tonne, down from a peak of ₹76,000 per tonne in 2022.

And guess what? India is importing steel from China at an even cheaper rate. At ₹48,000 per metric tonne, Chinese steel is undercutting Indian steel at ₹51,000, making it tough for domestic producers to compete.³

So, the big question is: Is the Indian steel sector doomed, or is there a silver lining? Or could this be a correction that presents an opportunity for investors?

Let’s zoom out for a bit to answer that. See, the general belief is that in a bull market, steel producers usually make money. In a bear market, steel consumers—like carmakers and construction companies—see lower costs. While this can squeeze the profitability of steel producers, the manufacturers can either maintain or improve their margins, or pass on the cost savings to consumers, resulting in lower prices for final goods.

But the world is changing. More economies are shifting toward services, and steel isn’t the industrial titan it used to be. So, consumers aren’t feeling the impact as strongly as before. And as for steel producers, their fate lies in economics. If the returns they make are lower than the cost of capital, the industry becomes a losing bet—especially in steel, where profit margins are already paper-thin.

But steel is far from dead. Well, at least in India where the per capita steel consumption is relatively low at 86 kg per annum compared to 219 kg of global average.⁴ And this is only expected to grow thanks to three trends: 1. India’s infrastructure projects and the booming auto sector need steel—lots of it. 2. India is becoming a hub for electronics manufacturing, further boosting steel demand. 3. The government’s ambitious target to increase crude steel capacity in India to 300 MT and production to 255 MT by 2030.

And Indian steelmakers are investing big to meet these targets.

So yeah, steel seems set to soar in India.

But before we get too excited, let’s remember that steel is a highly cyclical and volatile industry. Prices can swing wildly with demand and supply changes.

So, if you were running a steel company, here are the factors you’d keep an eye on:

1. Production capacity: The more steel you can produce, the more revenue you can generate.
2. Costs: Fluctuations in raw material prices like iron ore and coal can make or break profitability.
3. Global demand: Since the steel market is globally connected, what happens in China or Europe directly affects Indian steelmakers.
4. Government policies: Tariffs, taxes, and regulations are game-changers. For example, the EU’s new carbon tax, the Carbon Border Adjustment Mechanism (CBAM), will hit Indian exports hard, adding $100 to $190 per tonne of additional costs.

And if you’re an investor, there are a few more things to consider:

1. Profit margins: Given the low margins in the steel business, tracking how companies manage their costs and production levels is crucial.
2. Debt levels: Steel is a capital-intensive business, so managing debt while growing is critical for long-term success.
3. Capacity utilization: Companies that operate close to full capacity are usually more efficient and profitable, while low utilization signals trouble.

Now, imagine how Warren Buffett would approach the steel sector in India. He’s famous for saying, “Buy into a company because you want to own it, not because you want the stock to go up.” Buffett wouldn’t touch a cyclical industry like steel without understanding the full demand-supply cycle, the industry valuations, and the company’s competitive edge—or moat—that sets it apart from rivals and brings in higher profit margins.

On the other hand, a savvy trader might play the market cycle, focusing on stock trends, technical indicators, and macroeconomic changes. They’d jump in at the right time to ride the wave and cash in during corrections.

And that brings us to the last bit of this story, where we look at some top steel companies in India, and how they are doing.

Tata Steel is strategically expanding and cutting costs, positioning itself for a rebound as India’s infrastructure projects gain momentum. Long-term, it’s aiming to achieve 40 MTPA domestic steel capacity by FY30. JSW Steel plans to increase its capacity to produce around 37 MTPA of crude steel by 2027. Vedanta, with its diversified metals portfolio, benefits from backward integration in raw materials like bauxite and coal. And the government giant, SAIL, currently produces more steel at 19 MMT than all of Canada combined at 12.9 MMT.

Of course, this only scratches the surface of what’s happening in these companies.

To really assess if steel stocks are a good buy, you’ll need to dig into key metrics like the price-to-book (P/B) ratio, which shows how the market values a company’s assets compared to their actual worth. In capital-heavy industries like steel, where factories and equipment dominate the balance sheet, this is a crucial indicator. Also keep an eye on the price-to-earnings (P/E) ratio to see how much investors are paying for each rupee of earnings, and the debt-to-equity ratio, especially in an industry so reliant on heavy financing.

So yeah, that’s what’s brewing in the Indian steel markets.

This industry may be cyclical, but timing and the time one is in this market are everything. And the sector could rise from the ashes as the country modernizes and develops, but you need to keep a close eye on the numbers.

Until next time…

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Story Sources: Reuters [1], S&P Global [2], The Daily Briefing [3], Ministry of Steel [4]

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