India: Stable crude steel output masks softer manufacturing sentiment

• • Crude steel production holds at 14.1 mnt despite weaker manufacturing PMI

• • Higher domestic coal output and record electricity demand indicate investment activity remains resilient

• • Manufacturers slow procurement as new orders, exports and hiring lose momentum

Morning Brief: India’s macroeconomic indicators for June suggest the investment cycle remained resilient even as manufacturing sentiment softened. Stable steel production, record electricity consumption and higher automobile output indicate infrastructure spending and industrial activity continued to support commodity demand through the first quarter of FY27. At the same time, manufacturers reported slower growth in new orders, exports, hiring and procurement, signalling factory activity is transitioning from the rapid expansion seen earlier this year to a more measured pace.

The divergence is particularly relevant for commodity markets. Demand linked to construction, infrastructure and manufacturing continues to underpin consumption of steel and coal, but softer factory sentiment suggests businesses are becoming more selective in production and inventory decisions. June’s data therefore point to an economy where investment remains the principal driver of industrial activity even as demand conditions across manufacturing begin to normalise.

Steel output remains stable despite softer manufacturing indicators:

India’s steel sector remained resilient during June despite signs of weaker manufacturing momentum. Crude steel production was unchanged at 14.1 million tonnes (mnt) for a second consecutive month, while steel exports recovered to 0.65 mnt from 0.578 mnt in May. Steel imports eased to 0.60 mnt from 0.63 mnt, suggesting domestic mills continued to meet downstream demand across infrastructure and manufacturing.

Pig iron production moderated to 0.75 mnt from 0.79 mnt in May, while iron ore imports declined to 1.15 mnt from 1.24 mnt. The moderation in raw material purchases coincided with weaker manufacturing orders and slower procurement activity reported in the PMI survey rather than a deterioration in steel demand itself. Stable crude steel production despite softer manufacturing sentiment suggests investment-linked sectors continued to provide sufficient support for domestic steel consumption, even as export demand and factory orders lost momentum.

Coal and power demand continue to reflect firm industrial activity:

Power and coal indicators also remained supportive during June. Daily average electricity consumption climbed to a record 5.50 billion units, up from 5.32 billion units in May, reflecting sustained demand from industry alongside seasonal cooling requirements. Domestic coal production increased to 80 mnt from 78 mnt, while coal imports declined to 20.4 mnt from 22.8 mnt.

The combination of higher domestic coal output and lower imports suggests domestic supply met a larger share of power demand during the month. Rising electricity consumption, together with stable steel production and stronger automobile output of 3.00 million units, indicates industrial activity remained firm despite softer manufacturing surveys.

Manufacturing loses momentum after a strong start to the year:

Manufacturing remained in expansion during June, although growth slowed. HSBC India’s Manufacturing PMI eased to 54.2 from 55.0 in May, marking the second-slowest improvement in operating conditions since mid-2022. Output and new orders recorded their weakest growth in four years, while export orders expanded at their slowest pace since March 2023 amid weaker demand from European markets. Employment growth also slowed to its weakest pace this year as firms cited adequate capacity, while business confidence fell to a five-month low. At the same time, easing input cost and output price inflation provided some relief to manufacturers.

Outlook:

June’s indicators suggest investment-led activity continues to provide the foundation for India’s industrial economy. Stable steel production, record electricity demand and higher domestic coal output indicate demand across infrastructure, construction and manufacturing remains well supported, even as manufacturers become more cautious about new orders and procurement.

For commodity markets, the balance remains constructive. Steel and coal consumption continue to benefit from ongoing investment activity, but the pace of growth will increasingly depend on whether factory orders and export demand recover over the coming months. Until then, commodity demand is likely to remain supported by domestic investment even as manufacturing settles into a more sustainable rate of expansion.