Steel demand growth to remain comfortable at around 8% in FY2026: ICRA

ICRA anticipates that the environment for domestic steel producers will stay tough in the coming quarters due to ongoing low steel prices, stable but high input costs, and a fragile external market. The latest report on the steel sector indicates that operating margins for FY2026 are expected to hover around 12.5%, unchanged from previous estimates, and lower than the projected 100-120 basis points increase, mainly due to persistent weak steel prices. With limited earnings growth, industry leverage (TD/OPBDITA) is forecasted at 3.4 times for FY2026, compared to our August 2025 estimate of 3.1 times and 3.5 times in FY2025.

Girishkumar Kadam, Senior Vice-President & Group Head, Corporate Sector Ratings, ICRA, said, “The domestic steel industry has seen a record capacity addition of around 15 mt over the past three to four quarters, with another 5 mt expected to come on stream by the end of the current fiscal. While we project steel demand growth to remain healthy at around 8% for FY2026, implying incremental demand of around 11-12 mtpa, incremental supply has created a temporary surplus situation, resulting in continued pressure on steel prices. Consequently, while domestic HRC prices spiked to ₹52,850 per tonne in April 2025 following the 12% Safeguard Duty (SGD), they corrected to around ₹49,500 per tonne by September 2025 and around ₹46,000 per tonne by November 2025. Domestic HRC prices are currently trading below import parity, reflecting persistent supply-side pressures.”

In the external environment, steelmakers remain on tenterhooks, with multiple structural headwinds in the Chinese economy driving the country’s steel exports to an all-time high of 88.0 mt in 9M CY2025, up from 80.6 mt in the corresponding period last year. With most other large steel-consuming hubs globally also facing subpar economic activity, global steel prices are unlikely to recover materially in the near term. Chinese HRC export prices averaged about $465 per tonne in 7M FY2026, down from $496 per tonne in the previous fiscal, further limiting the ability of domestic producers to increase steel prices.

India’s finished steel imports have declined sharply in the current fiscal, with volumes contracting by about 33% year-on-year compared to the same period last year. While export demand remains lacklustre, FY2026 net finished imports (indicating finished steel imports less exports) are poised to decline on the back of reduced inbound shipments. However, rising trade barriers in key consumption markets such as the US and EU could divert surplus global steel volumes towards high-growth markets like India. In this context, the continuation of the Safeguard Duty remains critical to prevent a surge in imports and protect domestic prices from external shocks.

According to ICRA’s baseline outlook, domestic HRC prices are projected to stay around ₹50,500 per tonne in FY2026. Cost expectations include some relief from softer input prices, particularly premium hard coking coal, which is expected to decline by approximately 9% year-on-year to $192 per tonne in the first half of FY2026. ICRA estimates the industry’s operating profit per tonne of steel at US$ 108 in FY2026, slightly lower than the US$ 110 recorded in FY2025. Overall, the sector’s outlook remains stable.

Over the next seven years until FY2031, domestic steel mills aim to expand capacity by nearly 40% through adding 80-85 million tonnes, resulting in an investment pipeline of US$ 45-50 billion. However, unless the industry’s earnings significantly improve from this point onward, maintaining such large-scale investments could lead to a notable increase in leverage levels over the medium term, which may heighten the domestic mills’ vulnerability to external macroeconomic shocks, per the report.

Kadam said, “The share of green steel in India’s overall steel demand is expected to rise from ~2% (around 4 mt) in FY2030, to nearly 10% (~30 mt) by FY2040 and further to 40% (~150 mt) by FY2050, driven by decarbonisation commitments across end-user industries. However, the green steel economics remains challenging, with break-even levelised cost of green steel in Direct Reduced Iron - Electric Arc Furnace (DRI-EAF) route against conventional production dependent on green hydrogen prices falling close to $1.5-1.6 per kg. However, the same is unlikely to be achieved in the near to medium term, which in turn would constrain a large-scale adoption of green steel capacity.”

Over the next seven years till FY2031, domestic steel mills aim for a capacity expansion of nearly 40% by adding 80-85 mt, which represents an investment pipeline of US$ 45-50 billion. However, unless the industry’s earnings significantly improve from this point, maintaining such large-scale investments may face challenges.