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1QFY26 preview: Steel prices, benign raw material costs to drive earnings

We estimate operating profits across our metals coverage universe to expand by ~3% QoQ in 1QFY26, driven by improved realisations and lower input costs. Indian steel prices improved sequentially in 1Q - flat product prices increased by ~INR3k/t while long product prices improved by INR0.6k/t. Steel companies have guided for a ~USD10-15/t reduction in coking coal consumption cost for 1QFY26. Consequently, spreads for Indian steel producers are likely to expand by ~INR2k/t in 1Q, driven largely by improved realisations and lower coking coal consumption costs partially offset by high iron ore prices and lower scale. Volumes are expected to remain soft given a seasonally higher base in 4Q. However, spot spreads for steel players remain weak with spot HRC and rebar prices trending down in Jun’25 and Jul’25. Although, with China HRC prices witnessing a recent uptrend, Indian steel prices are expected to follow – hinting towards towards a strong 2H for steel players. Non-ferrous players are expected to witness a subdued quarter with LME prices witnessing a downtrend compared to 4Q given macroeconomic uncertainty. Average LME Aluminium came in at ~USD2.46k/t in 1QFY26, down by ~USD160/t compared to 4Q. A slowdown in global demand might impact Novelis margins in the near-term but the long-term outlook for Hindalco continues to remain buoyant. Within our coverage, JSPL (lowest leverage, highest projected volume growth), Hindalco and Tata Steel remain our preferred picks.

* China steel prices remain muted amid weak demand: China’s domestic HRC and rebar prices declined ~4% QoQ in 1Q to USD448/t and USD466/t, respectively, driven by continued demand weakness in the real estate sector. China’s CY24 steel exports surged 22% YoY to 111mn tonnes, with Apr’25 exports at 10.5mn tonnes (+13% YoY). Despite on-going stimulus, subdued domestic demand and rising exports may weigh on global steel prices. While China has announced intentions to curtail domestic production, any material impact could lend support to prices.

* Global steel-making raw material prices remain soft: Coking coal prices currently trade at USD180/t, down USD4/t from 1QFY26 average of USD184/t. Iron ore CFR prices declined 4% QoQ to USD92/t, with spot levels currently lower at USD89/t. The soft raw material environment continues to be supportive for steel margins globally.

* Indian steel players to witness improved spreads in 1Q: Realisations for Indian steel players are expected to witness an uptrend in 1Q with the recently imposed 12% safeguard duty on flat products in April. Average domestic HRC prices came in at INR51.8k/t, an increase of ~INR3k/t compared to 4Q. Longs prices increased to ~INR43.4k/t, up ~INR0.6k/t compared to 4Q. NMDC announced a price hike (INR440/t) and a price cut (INR150/t) in May’25 and Jun’25 respectively. Steel companies guided for a ~USD10-15/t decline in coking coal consumption cost for 1Q. Consequently, Indian ferrous players are likely to witness an EBITDA/t expansion to the tune of ~INR 2k/t in 1Q given higher realisations and lower coking coal costs, partially offset by high iron ore prices and lower scale. Operating leverage is usually lower in 1Q compared to a seasonally strong 4Q. JSPL (low leverage, high volume growth over next few years), Hindalco and Tata Steel remain our top picks in the space.

* Non-Ferrous players to witness a subdued quarter: Non-ferrous players are expected to witness a subdued quarter with LME prices witnessing a downtrend compared to 4Q given macroeconomic uncertainty. Average LME Aluminium came in at USD2.46k/t, down by ~USD160/t compared to 4Q. A slowdown in global demand might impact Novelis margins in the near-term but the long-term outlook for Hindalco continues to remain buoyant. Hindustan Zinc is also expected to witness a soft quarter given lower LME Zinc prices (down ~USD200/t QoQ in 1Q) and lower refined metals volume reported in 1Q.

* China landed steel prices at a discount to domestic prices; spot spreads remain weak: The recently imposed 12% provisional safeguard duty reduced the price differential between domestic HRC and imported material. Landed HRC from China now stands at ~INR49.8k/t, reflecting a discount of INR1k/t compared to a discount of INR1.2k/t earlier in 4Q. Spot spreads remain weak with spot HRC and rebar prices down by ~INR1k/t and ~INR3.5k/t compared to 1Q average.

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