India's small steelmakers cut output as weak demand, falling prices bite

India's small steelmakers are struggling with weak demand, rising inventories and falling prices, highlighting a construction slowdown despite New Delhi introducing its biggest consumer tax cuts in eight years to boost growth and counter steep U.S. tariffs.

India's economy grew 7.8% in the April-June quarter, above analysts' expectations, but a slowdown in steel demand - reflecting weaker construction activity - points to some caution over whether the rapid pace of growth can be sustained.

Last month, India sharply cut taxes on hundreds of consumer items, including small cars and cement, the key sectors influencing steel demand, to spur consumption and offset the impact of punishing U.S. tariffs on Indian goods.

Still, small steel producers, who account for about 45% of India's total steel capacity of around 200 million metric tons and employ more than 1.5 million people, said they have cut production by up to a third as construction activity remains weak and demand from the automobile sector has yet to pick up.

Heavy monsoon rains have slowed demand from the construction sector, which accounts for nearly a third of steel consumption, while rising input costs, including iron ore and electricity, weigh further on the industry.

Demand began to slacken in July, a month after India's four-month monsoon season started and rains intensified.

"There is a slowdown, and there is no demand from construction," Adarsh Garg, chairman of small steel producer Jogindra Group, said. Garg added that his company has cut production by around 30%.

"We are still waiting that maybe with the GST cut for automotives, there might be a positive effect," he said, referring to the reduction in India's Goods and Services Tax.

Weak steel demand is the first sign that the tax cuts have had an uneven impact on overall consumption. The weak demand is reflected in domestic prices of hot-rolled coils, which fell to a six-month low of 49,144 rupees ($553.55) per ton in September, commodities consultancy BigMint said.

Prolonged rainfall and delayed or limited purchases due to site disruptions at construction projects are weighing on steel demand, BigMint said in a statement to Reuters.

"Till December I don't expect the situation to improve," said Vedant Goel, director at Enlight Metals.

Nitin Kabra, director of Bhagyalaxmi Rolling Mill, said trade tariffs are affecting consumer industries with exposure to the U.S., weighing on their spending and, in turn, contributing to lower steel demand.

The weakness in demand contrasts sharply with last year, when strong consumption led suppliers from China, Japan and South Korea to flood the Indian market, prompting the government to impose a temporary tariff in April to curb cheap imports.