Whalesbook
Steel Outlook: Demand Up, Costs Soar
India's steel sector is set for a strong Q4FY26, driven by rising prices and steady domestic demand. Hot-rolled coil (HRC) prices jumped about 30% since December 2025 to around ₹59,500 per tonne in early April 2026, a three-year peak. This surge, supported by safeguard duties and construction activity after the monsoon, has outpaced falling imports. India's steel output grew 9.7% in February 2026, making the country a net exporter. However, this good news is tempered by soaring input costs and major energy supply disruptions nationwide.
Rising Costs Squeeze Steel Margins
Despite the strong steel price rebound, costs are climbing. Coking coal prices remain high, around $237-$251 per tonne, and iron ore prices are firming, with NMDC raising domestic prices by up to 11.1% from April 5, 2026. Adding to the pressure, India faces widespread energy shortages, especially of natural gas and LPG. These are linked to Middle East geopolitical tensions that have disrupted key shipping routes. These energy limits inflate operating costs and force plant shutdowns or reduced production. JSW Steel has faced disruptions from gas shortages, and Jindal Stainless has had to cut capacity. This combination of higher input costs and energy scarcity risks cutting into expected profit gains from higher steel prices.
Aluminium Hit by Geopolitics and Operations
The non-ferrous metals sector, particularly aluminium, faces tougher challenges. Global aluminium prices have jumped due to supply disruptions in the Middle East, driven by conflict and the closure of key shipping routes like the Strait of Hormuz. This crisis could cut 3-3.5 million tonnes of aluminium output in 2026, hitting global supply chains hard. For Hindalco Industries, fires at its Novelis facility in New York are a major blow, expected to impact cash flow by $550 million to $1.6 billion for FY26. Operations there are expected to restart in the second quarter of 2026. National Aluminium Company (NALCO) is also feeling pressure from falling alumina prices, though they have stabilized somewhat recently.
Market Outlook and Demand Drivers
India's steel demand is forecast to grow 7-8% in FY2026, fueled by infrastructure and construction projects. However, this outlook is uncertain if rising energy costs lead to a wider industrial slowdown. Steel prices have risen about 43% since mid-December 2025, trading above import costs even with duties. But the lasting impact of inflation raises questions about how long these gains can hold. China's weaker steel demand continues to affect global prices, though India's export growth offers some relief. In aluminium, the Middle East crisis is changing market dynamics, likely causing extended supply shortages and higher prices, especially in Europe and the US. India's own aluminium demand remains strong, expected to grow about 4.4% annually, boosted by sectors like electric vehicles and infrastructure.
Company Valuations Amid Challenges
Major players reflect these market dynamics. JSW Steel, valued around ₹2.77 lakh crore, trades at a P/E ratio between 33.35 and 47.4, showing investors expect continued performance despite challenges. APL Apollo Tubes, worth about ₹54,572 crore, shows even higher growth expectations with a P/E near 46.55. National Aluminium Company (NALCO), with a market cap of roughly ₹72,574 crore, has a more cautious valuation at a P/E of 11.06, with analyst targets pointing to limited immediate upside.
Key Risks: Profit Squeeze and Supply Shock
The current positive outlook for the steel sector's Q4FY26 performance may not last. The main threat is the continued rise in raw material and energy costs, worsened by global instability. This could shrink profit margins if steel price hikes don't fully cover these expenses. Major energy shortages are already disrupting operations for companies like JSW Steel and Jindal Stainless, raising doubts about consistent production and timely deliveries. These shortages could affect broader industrial output and potentially reduce steel demand later in the year. For aluminium, the Middle East conflict poses a significant, ongoing supply risk, creating unpredictable prices and operational hurdles for companies like Hindalco, which is also dealing with the Novelis plant fire aftermath. Dependence on risky shipping routes and the potential for escalating conflict add considerable downside risk for aluminium producers and buyers.
Looking Ahead: Outlook and Dependencies
Analysts predict steel demand will continue to grow, moderating to 7-8% in FY2026, with potential improvement in FY2027 driven by government infrastructure spending. However, this forecast depends heavily on resolving energy supply problems and stabilizing global commodity prices. The outlook for non-ferrous metals is closely linked to the duration and intensity of the Middle East conflict, which is expected to keep aluminium prices and premiums high throughout 2026. Investors will be watching for moves to diversify energy sources and reduce supply chain risks in both sectors.