Budget 2026: Metals sector seeks policy steps to help stabilise margins

Budget 2026: Metals sector seeks policy steps to help stabilise margins

As Finance Minister Nirmala Sitharaman gears up to unveil the Union Budget on February 1, India's metal sector enters this pivotal policy moment from a foundation of resilience.

It is shadowed by mounting pressures on margins and pricing power that could erode its gains, if left unchecked.

Domestic demand for steel and non-ferrous metals stays strong, fuelled by government infrastructure spending that ensures steady volume growth. Balance sheets, fortified from past deleveraging, now stand healthier than in previous cycles, allowing companies to weather short-term storms.

This structural strength has propelled metal stocks to outperform broader markets in 2025, with standout performers like Hindustan Copper (+37%), Hindalco (+35%), and Tata Steel (+21%) signalling investor confidence in the sector's long-term durability, despite ongoing pricing headwinds.

Swastika Investmart says in its pre-budget note that these gains tie directly to infrastructure capex, manufacturing self-reliance, and energy transition themes, recommending buys such as Vedanta (11% upside), Hindustan Copper (18.7% upside), and AIA Engineering (14.4% upside) as beneficiaries of sustained policy support.

What to watch in Budget 2026

- Infrastructure and manufacturing capex continuity

- Measures to ease raw material and energy cost volatility

- Trade safeguards and scrap quality norms

- Incentives for mining, recycling and decarbonisation

Emerging pressures: Capacity surge meets volatile inputs

However, this optimism masks a shifting narrative. Capacity expansions are outpacing consumption growth, volatile input costs are resurfacing, and global dynamics are constraining pricing power—creating a chain of pressures that could affect profitability.

While demand holds firm, the influx of new supply has diluted companies' ability to pass on costs, leading to flat or compressed margins.

ICRA captures this tension in its FY26 projections, forecasting ~8 percent steel demand growth, moderated from prior highs due to slower capex in sectors like roads and railways.

Combined with softer steel prices, operating margins are expected to remain around ~12.5 percent year on year (YoY), even as safeguard duties and lower input costs sparked a brief Q1FY26 rally. Without policy intervention, these imbalances could turn tactical risks into structural drags, slowing sector momentum just as India's manufacturing ambitions ramp up.

Demand strength vs. pricing power erosion

Demand remains a bright spot, positioning India as one of the world's strongest metal markets amid global slowdowns. As Vinit Bolinjkar, Research Head at Ventura, explains: "India remains one of the strongest demand pockets globally for metals, led by steel, aluminium and zinc," with crude steel production surging over 10 percent YoY in 2025 and finished steel consumption maintaining a healthy growth in FY26. But healthy demand no longer guarantees pricing power.

Bolinjkar cautions: "The key nuance is that demand is healthy, but supply is growing faster, which is limiting pricing power."

This mismatch stems from global oversupply, particularly from China, where sluggish housing has flooded exports into markets like India, capping prices and forcing domestic players to compete on thinner margins. Foreign brokerage HSBC echoes this in its 2026 metals and mining outlook, predicting a sector rebound through higher steel prices and policy safeguards that provide an earnings floor, potentially re-rating steel equities as domestic demand and solid balance sheets drive valuations upside.

Absorption challenges, global headwinds

Growth risks are evolving from demand shortages to absorption challenges, as excess capacity could trigger temporary oversupply and range-bound prices, unless offset by faster domestic uptake or export gains. Ventura quantifies this: around 15 million tonnes of steel capacity were added in the last 3-4 quarters, with another 5 million tonnes slated by FY26-end.

Global trade factors also weigh in. For instance, the EU’s Carbon Border Adjustment Mechanism (CBAM), tightened from January 1, 2026, imposes higher compliance costs on carbon-intensive exports.

Bolinjkar notes: "Green steel remains capex-heavy, and its viability depends on materially lower green hydrogen costs." Delays in decarbonisation could penalise Indian exporters, widening the competitive gap and highlighting the budget’s potential role in bridging structural vulnerabilities.

Profitability tied to input costs

Profitability, once linked to leverage, now hinges on input cost management. In steel, Ventura anticipates stable low-teens margins in FY26, with weak realisations partially offset by operating leverage, though resurgent coking coal volatility adds fresh headwinds.

HSBC notes that recent price hikes (Rs 2,000/tonne in Dec 2025, with another Rs 1,500–2,000/tonne eyed for Jan 2026) could stabilise earnings, while low institutional ownership in metal stocks positions them for inflows on improved results.

Non-ferrous trends diverge: aluminium faces power and alumina sensitivities but benefits from value-added products; zinc thrives on lower power and by-products; copper contends with tight concentrates and falling treatment/refining charges.

Budget as stabiliser

Budget 2026 is likely to act not as a demand stimulus, but as a stabiliser targeting structural vulnerabilities, reducing raw material dependence and easing cost volatility to sustain sector momentum. Axis Securities outlines potential moves, including policies to boost domestic copper, zinc, and silver production via private mining participation and by-product incentives, aligning with Make-in-India initiatives.

Rare Earth Elements (REEs) are also a focus, with the government aiming to build a long-term domestic ecosystem for EVs and electronics, potentially introducing initial prospecting and refining incentives.

Steel analysts expect fiscal support for hydrogen-based DRI (Direct Reduced Iron) technologies, concessional green financing, iron ore beneficiation promotion, removal of import duties on critical raw materials, and rationalisation of royalties. Metals platform BigMint advocates zero duties on copper scrap, exemptions for critical minerals like cobalt/lithium, stainless steel tariff cuts to 15 percent, and initiatives to boost recycling. For rare earths, initial prospecting/refining incentives could lay long-term foundations.

Industry-specific asks

The steel sector seeks hydrogen DRI fiscal perks, green financing, iron ore beneficiation, and royalty rationalisation. Aluminium requests higher customs duties and strict scrap norms.

The copper segment calls for safeguard duties, FTA (Free Trade Agreement) quota adjustments, and smelting protections. Precious metals refiners push for duty parity, input-linked incentives, and more LBMA-accredited refineries. Bodies such as GJEPC, IBJA, and GJC advocate for reverse job work, diamond levy waivers, gold customs reductions, mining simplifications, enhancements to the Gold Monetisation Scheme, and overall tax rationalisation. (Expand abbreviations)

Gaurav Bhandari, CEO of Monarch Networth Capital, sums it up: “The metals sector is currently in a structurally strong phase, supported by favourable domestic and global demand-supply dynamics. Yet, input costs remain the wildcard, favouring scaled, efficient players.”

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