Steel cos to face near-term headwinds, warns Elara Capital; flags 4 reasons

Elara expects steel companies to face near-term headwinds, driven by softer steel prices alongside rising raw material costs, which are likely to result in margin compression in Q3FY26

Elara Capital has turned cautious on steel companies, flagging near-term headwinds amid softer steel prices and rising raw material costs. These factors, the brokerage said, are likely to result in margin compression in the third quarter of FY26.

 

Elara, in its report, noted that quarter-to-date hot-rolled coil (HRC) prices have declined by around ₹2,510 per tonne quarter-on-quarter, even as coking coal prices in Australia have risen about 7 per cent.

 

With year-to-date HRC production up 13 per cent year-on-year, Elara sees the market’s ability to absorb price hikes is capped at ₹500 to ₹1,000 per tonne. In contrast, aluminium prices, the brokerage believes, are likely to remain firm as China approaches its 45 million tonne output cap.

 

“We therefore continue to prefer aluminium producers over steel companies,” Elara said in its report.

Here are the 4 key reasons underpinning Elara’s cautious stance on the sector:

Global output down; China exports rebound

Global crude steel production declined around 6 per cent year-on-year to about 143 million tonnes, largely due to a 12 per cent contraction in China, Elara said, citing World Steel Association data. Output in the rest of the world grew around 1 per cent year-on-year.

 

On a month-on-month basis, global production rose about 1 per cent, supported by a 4 per cent increase in rest-of-world output, even as China’s output fell 2 per cent. After recording its first decline of CY25 in October, China’s steel exports rebounded in November, rising 8 per cent year-on-year and 2 per cent month-on-month to about 10 million tonnes.

China exports seen staying strong despite licensing norms

China is expected to introduce a steel export licensing mechanism from January 1, 2026, covering products such as billets, hot-rolled coils, and stainless steel. While no official rationale has been provided, Elara said the move appears aimed at curbing shipments that bypass value-added tax.

 

“Given weak domestic demand in China, quantitative restrictions are unlikely. In the near term, bureaucratic delays could lead to inventory build-ups,” the brokerage said. Despite rising global protectionism, steel exports have remained resilient, with year-to-date volumes exceeding about 100 million tonnes in the first 11 months of 2025, aided by persistent overcapacity and competitive pricing.

Indian export momentum likely to moderate

India’s crude steel production, Elara said, rose around 6 per cent year-on-year in October to about 13.6 million tonnes, with provisional data for November pointing to a further 12 per cent year-on-year increase and a 2 per cent month-on-month rise.

 

Steel imports fell sharply, down about 52 per cent year-on-year to around 0.39 million tonnes, on expectations of the restoration of safeguard duties. Anti-dumping duties on hot-rolled coil imports from Vietnam and electrical steel from China also kept overseas sourcing in check.

 

Exports, in contrast, jumped about 83 per cent year-on-year to around 0.73 million tonnes, driven by restocking demand from Europe ahead of the implementation of the Carbon Border Adjustment Mechanism.

 

“Our interactions with global steel traders indicate that export orders have dried up in December. Barring small volumes of galvanised products, there have been no major bookings from India,” Elara said, adding that carbon taxes and a likely reduction in EU quotas pose key challenges.

Weak domestic demand pressures prices

Elara noted that China’s HRC export prices declined 4 per cent month-on-month in November, marking the second consecutive monthly drop. Prices across other major markets were mixed, with North Europe and the United States seeing around 2 per cent month-on-month increases, while Japan recorded a 1 per cent decline.

 

In India, primary rebar prices remained flat for the second straight month, while domestic HRC prices softened about 2 per cent month-on-month to an FY26 low of around ₹46,750 per tonne, as supply continued to outpace demand. On the raw material side, iron ore prices slipped about 1 per cent month-on-month in both China and Australia in November before showing a mild recovery in December, according to Elara. 

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