Whalesbook
Steel Demand to Grow 8% in FY26, But Margins to Remain Flat: ICRA
ICRA projects India's steel demand to experience robust growth of approximately 8% in the fiscal year 2026. Despite this anticipated expansion, the rating agency foresees persistent pressure on steel prices, which is expected to keep profit margins for domestic producers flat. This outlook suggests potential headwinds for the sector, contrary to earlier expectations of an improvement.
The Core Issue: Demand vs. Pricing Dynamics
ICRA's analysis highlights a complex scenario for the Indian steel market in FY26. While demand is poised for healthy growth, an influx of incremental supply and intensified global competition are dampening price levels. Girishkumar Kadam, Senior Vice-President & Group Head at ICRA, noted that this temporary surplus is directly impacting prices, preventing them from rising despite strong demand. This situation is causing operating margins to stabilize rather than increase.
Financial Implications: Margins Under Pressure
The rating agency forecasts the industry's operating margin to hover around 12.5% in FY26. This projection indicates that profitability per unit of steel production will likely be modest. Operating profit per tonne of steel production is expected to be $108, a slight dip from the $110 registered in FY25. This means that while volumes may increase, the revenue generated per tonne faces challenges.
Market Reaction: Global Price Headwinds
Global steel prices are significantly influenced by structural issues in China, which has seen its steel exports surge to unprecedented levels. In the first nine months of calendar year 2025, China exported a staggering 88 million tonnes of steel. This massive outflow is exerting considerable downward pressure on international prices. Chinese hot-rolled coil (HRC) export prices averaged approximately $465 per tonne in the first seven months of FY26, a decrease from $496 per tonne in the same period last year.
Domestic Price Trends and Import Watch
Domestic hot-rolled coil (HRC) prices saw a spike to ₹52,850 per tonne in April 2025, partly due to the implementation of a safeguard duty. However, prices corrected significantly, falling to around ₹46,000 per tonne by November 2025. Currently, domestic prices are trading below import parity levels, underscoring the competitive pressure from international markets. ICRA anticipates domestic HRC prices to average around ₹50,500 per tonne in FY2026.
While India's finished steel imports have declined sharply by about 33% year-on-year in the current fiscal, ICRA emphasized that the continuation of the safeguard duty remains critical. This measure is essential to prevent a potential surge in imports that could further disrupt the domestic market.
Future Outlook: Capacity Expansion and Green Steel
The sector outlook has been maintained as 'Stable' by ICRA, suggesting that the overall industry structure is resilient. However, the agency flagged potential risks associated with the industry's ambitious capacity expansion plans. Domestic steel mills are targeting an addition of 80-85 million tonnes, which involves substantial investments estimated between $45-50 billion over the period of FY26 to FY31.
Such large-scale investments could significantly increase industry leverage over the medium term, especially if earnings do not improve substantially to service the associated debt. This presents a key risk factor for investors to monitor.
Green Steel Transition
Regarding the critical shift towards green steel, ICRA forecasts a substantial rise in its share of India's overall demand. It is expected to grow from approximately 2% (around 4 MT) in FY2030 to nearly 40% (150 MT) by FY2050. Despite this long-term trend, widespread adoption faces significant economic hurdles. Large-scale implementation is constrained by the cost of green hydrogen. Prices need to fall closer to $1.5-1.6 per kg for green steel production to become economically viable, a scenario that appears unlikely in the near to medium term.
Impact
This news has a direct impact on Indian steel producers, investors, and related downstream industries. While demand growth is a positive indicator, the pressure on prices and flat margins could affect profitability and shareholder returns. Companies planning significant capacity expansions will face financing and execution challenges if market conditions do not improve. The stable outlook suggests resilience, but the article points to specific financial and operational risks to monitor.
Impact Rating: 7/10
Difficult Terms Explained
- Operating Margin: A profitability ratio that measures how much profit a company makes for every dollar of sales after paying for variable costs.
- Incremental Supply: Additional availability of a product in the market, often referring to new production capacity coming online.
- Hot-Rolled Coil (HRC): A type of steel product produced by passing steel through rollers at high temperatures. It's a common form of steel used in construction and manufacturing.
- Import Parity: The price at which a product could be imported into a country, including all costs like shipping, tariffs, and insurance.
- Safeguard Duty: A temporary tariff imposed by a country on certain imports to protect domestic producers from a sudden, sharp increase in imports that causes or threatens to cause serious injury.
- Leverage: The use of debt to acquire assets or finance operations. High leverage means a company has a significant amount of debt relative to its equity.
- Green Steel: Steel produced using low-carbon or zero-carbon processes, often involving renewable energy sources and hydrogen instead of coal.
- Green Hydrogen: Hydrogen produced through electrolysis powered by renewable energy sources.