A steel company reports its best profit in years. Its P/E is five. The stock has already doubled, and within a year it has halved — while the P/E has risen to twenty. Nothing mysterious happened. Steel prices fell back from a peak, coking coal did not, and profit per tonne collapsed. For a metal company, a low P/E is often a description of the top of the cycle, not of a bargain.
A dhaba’s profit is the gap between what it gets for a roti and what the atta, oil and gas cost. When the price of rotis in the market rises but atta stays the same, the dhaba does well. When atta shoots up and customers will not pay more for rotis, the dhaba’s profit disappears — though it sold exactly as many rotis as before.
A steelmaker lives on the same gap, called the spread: the steel price minus the cost of iron ore and coking coal per tonne. Both sides are set largely by global markets. The company controls its efficiency, but not the two prices that decide most of its profit.
Everything is a spread
Where an Indian steelmaker’s advantage lies
- Captive iron ore. A company that mines its own ore pays roughly its mining cost rather than the market price, which protects its spread when ore prices rise. Since mining leases began to be auctioned, newer mines carry premiums paid to the state, so not all captive ore is equally cheap.
- Coking coal procurement. India imports most of the coking coal its blast furnaces use, so every steelmaker is exposed to global coal prices and to the rupee. Contract terms, sourcing diversity and inventory timing all matter.
- Product mix. Value-added products — coated, automotive and electrical steel — earn higher and steadier spreads than basic long and flat products.
- Scale and location. Large integrated plants near ore and ports have lower costs; secondary producers using scrap or sponge iron in electric furnaces have different cost drivers.
Aluminium, zinc and the rest
Non-ferrous metals are priced off the London Metal Exchange (LME), plus a regional premium, and converted into rupees — so the LME price and the exchange rate together set revenue. Aluminium smelting uses enormous amounts of electricity, so an aluminium company’s cost position depends on captive power, usually coal-based, and on its alumina supply. Zinc and silver producers earn from mining rather than smelting, so ore grade and mine life matter most. In each case, map the company’s costs against the global cost curve: the lowest-cost producers stay profitable when prices fall.
Valuing a cyclical
Because earnings swing so much, metal companies are valued on EV/EBITDA on mid-cycle earnings, on EV per tonne of capacity compared with the cost of building it, and on price to book. The trap is the P/E at the peak: it is lowest exactly when earnings are highest and about to fall. Watch debt too — steelmakers often borrow heavily to expand near the top of a cycle, and the new capacity arrives just as prices weaken.
Five more industries: check yourself
5 questions. Answers are revealed once you submit all of them.
1.A telecom operator raises tariffs and ARPU rises 12% with subscribers flat. Its EBITDA most likely rises:
2.A regulated utility adds ₹4,000 crore of approved projects, 30% equity, with a 15% allowed return. Its profit rises by about:
3.A retailer’s revenue grew 12%, but same-store sales fell 2%. Its growth came from:
4.A 300-bed hospital at 60% occupancy has ARPOB of ₹40,000 a day. Its annual in-patient revenue is about:
5.A steelmaker’s P/E is at a ten-year low after record profits. The cautious reading is:
Steel company ki kamai = steel ka daam − iron ore aur coking coal ka kharcha (spread). Dono daam zyada tar duniya ka bazaar aur China tay karte hain. ₹11,000 per tonne EBITDA mein coking coal ₹5,000 mehenga hua toh munafa 36% gir gaya. Apni iron ore mine wali company ko fayda. Sabse bada jaal: cycle ke top pe munafa sabse zyada, P/E sabse kam — sasta lagta hai, par wahi sabse khatarnak waqt. Mid-cycle kamai pe valuation karo.
- A steelmaker earns the spread between steel prices and iron ore plus coking coal; small price moves swing profit per tonne sharply.
- Captive iron ore, coal procurement, product mix and scale decide who holds up best.
- China’s exports and import parity set Indian steel prices; duties can shift them quickly.
- Non-ferrous metals follow LME prices and the rupee; aluminium’s cost is mostly power.
- Value cyclicals on mid-cycle earnings, EV per tonne and price to book — a low peak P/E is a warning, not a bargain.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- what is steel spread
- The steel spread is the difference between the selling price of steel and the cost of the main raw materials needed to make a tonne of it, chiefly iron ore and coking coal. Because conversion costs are relatively stable, the spread largely determines a steelmaker’s profit per tonne; it widens when steel prices rise faster than raw material prices and narrows when coking coal or iron ore rise while steel prices lag.
- why does coking coal price affect steel companies
- Because coking coal is one of the two main raw materials in blast-furnace steelmaking, and India imports most of what its steel industry uses. A rise in global coking coal prices therefore raises Indian steelmakers’ costs directly, often before they can raise steel prices, compressing their spread and profit per tonne. Companies with better coal procurement, or less dependence on blast furnaces, are less exposed.
- why do metal stocks look cheap at the peak
- Because at the top of the commodity cycle metal prices and profits are at their highest, so the price-to-earnings ratio looks low even when the share price is high. When prices fall back, earnings drop sharply and the same share price turns into a high P/E. Experienced investors therefore value metal companies on mid-cycle or normalised earnings, or on EV per tonne and price to book, rather than on a single peak year’s profit.