India Steel Index is at two-year low; what lies ahead? Check analysts' views

The India steel composite index, which sets the benchmark to understand carbon steel price changes across flat and long products in the domestic market, fell to a two-year low for the week ending January 27, 2024. According to the Steelmint website, the index has been consistently falling for 16 straight weeks to hit a two-year low on January 27.

Meanwhile, the Nifty Metal index has also declined 0.79 per cent year-to-date (YTD), and the S&P BSE Metal has slipped 1.09 per cent around the same time.

The reasons for the decline can be attributed to the following:

-Increased cost of iron ore and coke, which are raw materials for manufacturing steel, with no uptick in the pricing of finished products.

-The price of iron ore has risen around 50 per cent in the last few months and impacted the margin.

-Pricing in the export market is not great; on the other hand, as per Reuters, China's steel output is expected to rise for the first time in three years in 2023.

-As the election date approaches, spending has also come down, impacting demand.

-Demand for long steel products like rebar has been weak due to a liquidity crunch given construction bans in some regions.

-Prices of key raw materials like billets and sponge iron have been fluctuating, adding to uncertainty for buyers.

-Increased supply from new steel plants like NMDC's Nagarnar plant is putting downward pressure on prices.

Will the metal sector shine going forward?

Mukesh Kochar, National Head of Wealth at AUM Capital, expects the situation to improve going forward.

"Long steel prices are stable or moving up a little bit, but flat steel prices are moving down. China has cut its reserve requirement ratio (RRR) by 50 basis points, which will infuse additional liquidity up to $149 billion into the Chinese economy. This may help this sector a bit going forward," said Kochar.

"Metal is the most important indicator in deciding global health, with aluminium seeing some pick-up in demand, followed by copper prices, which are also seeing good demand in the lower zones. 

Currently, the Eurozone and the Chinese economy are phasing a rough ride from the economic point of view, and any green shoes from these economies of growth revival will fuel the prices of the metal on the higher side," said Atul Parakh, CEO of Bigul.

The Sticking Point

According to Abhijeet Bora, VP-Research, Sharekhan by BNP Paribas, the margin for steel companies would come under pressure in the near term due to the recent surge in the price of coking coal and iron ore, which would offset the benefit of volume growth.

On the valuation front, Bora said, "Steel companies like JSW Steel are rich in valuation at 7x FY26E EV/EBITDA and have elevated debt levels, which is a concern."

He added that NMDC will have earnings tailwinds supported by higher iron ore prices and strong iron ore demand supported by robust domestic steel demand.

AUM Capital's Kochar is neutral on the steel sector and expects JSPL to do well.

Additionally, the steel sector is looking strong at the current juncture, according to Atul Parakh, CEO of Bigul. However, the expert believes that globally, the demand is subdued, and some revival is seen in Chinese territory.

Overall, Parakh maintains a neutral to positive view of the metal sector from a medium-term perspective and expects metal prices to rebound from current levels.

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