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Steady quarter ahead; outlook positive

Indian steel markets witnessed a divergent price trend with long products prices moving up by INR4k/t QoQ while flat product prices declined marginally. Global steel making raw materials witnessed a sharp correction – spot coking coal down at ~US$256/t (down sharply by US$75/t from peak), iron ore at US$99/t (down US$25/t from recent peak) driven by subdued Chinese demand outlook. Gross margin of India steel players are likely to expand by INR1.3k-1.5k/t in 1QFY25, driven by marginally higher realizations and lower coking coal consumption cost (~US$10/t). However, EBITDA/t expansion may be limited with the lack of scale, given the high volume base in 4Q seasonally. Working capital requirements is likely to offer some relief as steel / raw material prices trend down leading to better chances of net debt reduction. Spot spreads for steel players witness expansion (higher than 4Q) given sharp recent fall in coking coal prices. Aluminium prices averaged USD2,572/t in 1Q25 driven by the ban on Russian Metal in LME. Hindalco expected to post strong quarterly earnings given higher realization and subdued coal prices (CoP expected to be down 1-2%). JSPL (lowest leverage, highest volume growth over next few years) and Hindalco (Novelis delivering record margins) remain our top picks in the space.

* China steel price trends down on soft demand: China domestic HRC prices declined by US$45/t from recent peak to USD521/t driven by higher production (up 8% MoM in May) and subdued demand. Chinese rebar prices corrected US$40/t from peak to US$530/t in tandem with the broader markets. China’s steel exports continued to trend upwards of ~8mn tons/month, further pressurizing global steel prices. Exports from China registered an increase of 26% YoY YTD. China real estate sector continues to reel under significant pressure with floor space starts down ~20%+ YTD.

* Global steel making raw materials sharply off peak: Coking coal prices normalized to USD256, down 23% from the peak in Jan’24 as inclement weather (La Nina) subsided. Australian coking coal exports to China continues to remain soft despite the lifting of trade restrictions. China iron ore CFR prices stood at USD99 primarily due to slowdown in China’s Real estate sector despite the efforts of the Govt. for revival. Coking coal consumption cost relief is likely to aid spot steel margins should it sustain.

* Marginally improved realizations, lower RM costs to aid margins in 1Q; spot spreads higher: Indian steel markets witnessed a divergent price trend with long products prices moving up by INR4k/t QoQ while flat product prices declined marginally. Global steel making raw material prices witnessed a sharp correction – spot coking coal down to ~US$256/t, a decline of US$75/t from recent peak; iron ore at US$99/t down US$25/t from recent peak driven by subdued Chinese demand outlook. Expectation of marginal rise in realizations and lower coking coal consumption cost (~-10/t) may lead to higher gross margins (+1.3k-1.5k/ton) QoQ. However, EBITDA/t expansion may be limited with the lack of scale given the high volume base in 4Q seasonally. Spot spreads for steel players witness correction (higher than 4Q) given sharp recent fall in coking coal prices. Working capital requirements is likely to offer some relief as steel / raw material prices trend down leading to better chances of net debt reduction. JSPL (lowest leverage, highest volume growth over next few years) and Hindalco (Novelis delivering record margins) remain our top picks in the space.

* Aluminium sustains at high levels given curbs on Russian metal: Aluminium prices averaged USD2,572/t in 1Q25, higher by 331/t QoQ. This was primarily driven by the ban on Russian metal in London Metal Exchange. We anticipate strong quarterly earnings by aluminium producers such as Hindalco given higher realization and subdued coal prices (CoP expected to be down 1-2%)

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