Indian steel companies from Tata Steel Ltd. to JSW Steel Ltd. and Steel Authority of India Ltd. may face challenges in the coming quarter after the Indian hot rolled coil steel price hit a four-year low due to sluggish demand from China, the world's largest steel consumer.
China in July cut its steel production by 9% month-on-month to its lowest in 2024. And despite production cuts driving prices upward, poor demand from key steel consumer sectors has led to a 3% drop in China's HRC steel prices.
China, the world's biggest steel producer, cut output in July due to weak demand amid sluggish recovery in Chinese economy.
Steel production in July fell 9% month-on-month to 82.94 million tonne, according to the statistics bureau on Thursday. Total steel production from January to July 2024 reached 613.72 million tonne, a 2.2% decline on annual basis.
July data revealed a third consecutive month of shrinking factory output and a significant downturn in the real estate sector, with newly built home prices plummeting to their worst decline in nine years. Additionally, China's top steelmaker has described the current industry crisis as more severe than those of 2008 and 2015.
Overproduction or production cuts of a commodity typically lead to price decreases or increases, respectively. However, the downward trend in Chinese steel prices is due to weak demand, as production cuts are occurring not in a strong-demand environment but amid downturns in key sectors.
Additionally, trade barriers imposed by regions such as the US and Europe to limit cheap Chinese steel imports are further dampening demand for China, the world's largest steel producer.
Impact On Indian Steel Prices
The decline in Chinese hot rolled coil, or HRC, steel prices has a cascading effect on Indian HRC steel prices, given China's global benchmark status as both the largest steel producer and the top consumer.
Despite a production cut, the price of Chinese HRC steel fell 3% from a month ago and 10% year-on-year as of Aug. 13 due to a downturn in key sectors like real estate and manufacturing,.
That caused the Indian HRC steel price to fall by 3% from a month ago to Rs 51,000 per tonne, the lowest in four years. Prices have dropped 5% from a three-month period and 10% from a month ago, according to IDBI Capital data.
This lowering of steel prices has a negative impact on Indian steel companies like Tata Steel, JSW Steel, the Steel Authority of India, Jindal Steel and Power.
The most immediate impact is a potential decline in profit margins, as lower prices mean less revenue per tonne of steel sold. Companies could also see margins eroding further if they decide to reduce their selling prices in order to stay competitive. Furthermore, steel companies could also see inventory losses if they hold inventories at higher costs.
Demand is the only cushion that could possibly help steel companies. Lower steel prices can stimulate demand from downstream industries like construction, automotive, and manufacturing, leading to higher sales volumes.
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