Steel Shares Surge on Extended Import Duty

Domestic steel producers saw their share prices climb between 4% and 6% since late December following the finance ministry's notification to extend safeguard duties on steel imports. This action, based on the director general of trade remedies' recommendation, provides a significant boost to companies like JSW Steel Ltd and Jindal Steel Ltd, which both recorded 6% gains.

The duty will be applied for three years, starting at 12% for the first year, then 11.5% for the second, and concluding at 11% in the third year. This follows an interim order in April that aimed to curb import surges but lapsed in November, suggesting prior government hesitation due to concerns over higher steel prices impacting downstream industries, particularly small and medium-sized enterprises already grappling with export slowdowns.

Domestic Prices to Gain Premium

Analysts predict this safeguard enactment will allow domestic prices to trade at a minimum 10% premium over international prices for the next two and a half years. This premium is estimated to be between $60-$65 per tonne at spot levels, which is expected to enhance domestic steel mills' profit margins beyond their average levels, according to a December 31 report by ICICI Securities. Spot prices for flat steel products had already risen about 6% in the final week of December, and the duty extension is likely to provide further support.

The announcement offers considerable relief to companies previously burdened by increasing supplies and slower demand growth. Imports had already dropped by approximately 40% after the interim duty took effect.

Q3 Challenges and Surplus Supply

Data from Motilal Oswal Financial Services indicates that steel consumption grew by 5.2% year-on-year during the first two months of the December quarter (Q3FY26). However, production saw a higher growth of 10.5%, with several new production facilities coming online. This imbalance led to sequential price declines of about 3-5% and year-on-year drops of 2-12% for various steel grades in Q3.

Several new plants, including a three million tonnes per annum (mtpa) facility commissioned by Jindal Steel in September and expected ramp-ups of JSW Steel and Tata Steel Ltd's five mtpa facilities by FY26-end, may sustain domestic market surplus. Producers might need to reduce capacity utilization to manage prices.

Cost Pressures and Q4 Outlook

Compounding these issues, the industry faces rising costs, with coking coal prices increasing by approximately 9% sequentially. These adverse conditions are expected to weigh on Q3FY26 results, with companies projected to report a sequential decline of around ₹2,000 per tonne in their Ebitda, according to JM Financial Institutional Securities. Despite these Q3 headwinds, expectations for Q4 are more optimistic, supported by improved steel prices and the quarter's historically strong seasonality.

Valuations and Future Trajectory

Steel company stocks have shown strong performance over the past year, rising between 13% and 30%, partly driven by the interim safeguard duty. Current valuations vary, with JSW Steel trading at approximately 10 times its FY27 estimated Ebitda, while Tata Steel, Steel Authority of India Ltd, and JSL are valued at 7-8 times their Ebitda, according to Bloomberg data. The future stock performance will depend on maintaining balanced supply dynamics and a stable price trend, alongside robust demand.