1. LNG Supply Disruptions Are Emerging as a Structural Risk for Steel Production
Gas Shortages Begin to Impact Operational Continuity Across Steel Clusters
India’s steel industry is beginning to experience a fresh layer of disruption, not from raw materials like iron ore or coking coal, but from energy availability, particularly liquefied natural gas (LNG). Recent developments indicate that gas shortages, triggered by supply disruptions in global LNG markets and tightening availability due to geopolitical tensions, are directly affecting production continuity in several steel clusters. This marks a significant shift in the industry’s risk profile, where energy is no longer a stable input but a volatile and critical constraint.
Gas-based steel processes are particularly vulnerable to such disruptions, especially in segments like direct reduced iron (DRI), secondary steelmaking, and downstream value-added units such as galvanizing and coating. Several plants, particularly in western India, have reported reduced gas allocations, forcing them to either cut output or consider temporary shutdowns. The situation has been further aggravated by the diversion of LNG cargoes to higher-paying markets, reducing availability for industrial users in India.
India Natural Gas Supply Dependency
| Parameter | Value |
|---|---|
| LNG Import Share in Total Gas Supply | ~50–55% |
| Industrial Sector Gas Consumption Share | ~35–40% |
| Steel Sector Gas Dependency (Specific Segments) | High (DRI, downstream) |
| Key Import Sources | Qatar, USA, Australia |
The high dependence on imported LNG exposes Indian industry to global price fluctuations and supply disruptions. Unlike coal, which has domestic availability to some extent, natural gas remains significantly import-dependent, making it vulnerable to external shocks. As LNG cargoes are increasingly diverted due to geopolitical developments, domestic availability tightens, directly impacting industrial consumption.
2. Gas-Based Steelmaking Segments Face Immediate Production Risks
DRI and Secondary Steel Units Are the Most Exposed
The impact of LNG shortages is not uniform across the steel industry but is concentrated in specific segments that rely heavily on gas as a primary energy source. The Direct Reduced Iron (DRI) segment, which forms a crucial part of India’s steel value chain, is particularly exposed due to its dependence on natural gas for reduction processes. India is the world’s largest producer of DRI, with annual production exceeding 40–45 million tonnes, a significant portion of which is gas-based.
Gas-based DRI plants are typically more efficient and environmentally cleaner compared to coal-based alternatives; however, their reliance on continuous gas supply makes them highly sensitive to disruptions. Even short-term supply constraints can lead to operational inefficiencies, increased costs, and production cuts.
India DRI Production Profile
| Parameter | Value |
|---|---|
| Total DRI Production | 40–45 MnT |
| Gas-Based DRI Share | ~35–40% |
| Coal-Based DRI Share | ~60–65% |
| Major Clusters | Gujarat, Maharashtra, Odisha |
In addition to DRI, downstream steel processing units such as galvanizing and color coating facilities are also affected. These units rely on gas for heating and processing applications, making them vulnerable to fluctuations in gas supply and pricing. As these segments are closely linked to industries like automotive, appliances, and construction, disruptions can quickly cascade across the broader manufacturing ecosystem.
3. LNG Price Volatility Is Increasing Production Cost Uncertainty
Energy Costs Are Becoming a Key Driver of Steel Margins
Beyond supply constraints, the volatility in LNG prices is adding another layer of complexity to steel production economics. Global LNG prices have seen sharp fluctuations in recent months due to geopolitical tensions, shipping disruptions, and increased competition for cargoes from Europe and East Asia. Spot LNG prices, which had moderated to around USD 10–12 per MMBtu in early 2025, have recently spiked to levels of USD 14–18 per MMBtu, significantly increasing input costs for gas-dependent industries.
This increase directly impacts the cost of steel production in gas-based facilities, where energy can account for 20–25% of total production cost. As gas prices rise, the cost competitiveness of gas-based steelmaking declines relative to coal-based processes, forcing producers to reassess their operational strategies.
LNG Price Trend (Indicative)
| Period | LNG Price (USD/MMBtu) |
|---|---|
| Early 2025 | 10 – 12 |
| Mid 2025 | 12 – 14 |
| Early 2026 | 14 – 18 |
The rise in LNG prices also affects pricing strategies for finished steel products. Producers facing higher input costs may attempt to pass on these increases to customers; however, competitive pressures, particularly from imports, limit their ability to do so. This creates a margin squeeze, especially for smaller players who lack pricing power.
At a broader level, the increasing volatility in energy costs signals a structural shift in steelmaking economics, where energy security is becoming as important as raw material availability. As the industry adapts to this new reality, the interplay between gas prices, supply availability, and production decisions will play a critical role in shaping market dynamics.
4. Margin Pressures and MSME Disruptions Are Intensifying Across the Value Chain
Energy Cost Inflation Is Reshaping Profitability and Operational Stability
The ongoing LNG shortage is now translating into tangible financial stress across the steel value chain, particularly for small and medium-scale enterprises that operate with limited cost absorption capacity. While large integrated steel producers have some flexibility to switch between fuel sources or absorb temporary cost spikes, MSMEs and secondary steel units are significantly more exposed due to their dependence on gas-based operations and thinner margins. The sudden escalation in LNG prices, coupled with inconsistent supply, has led to a sharp increase in operating costs, forcing many smaller units to either reduce production or temporarily suspend operations.
This pressure is particularly evident in sectors such as re-rolling mills, galvanizing units, and downstream fabrication clusters, where energy constitutes a significant portion of total cost. In several industrial clusters across Gujarat and Maharashtra, industry participants have reported output cuts ranging between 20–40%, primarily due to gas unavailability or unviable input costs. The cascading effect of such disruptions is beginning to impact supply timelines for end-user industries, including automotive components, appliances, and construction materials.
Cost Structure Impact – Gas-Based Steel Units
| Cost Component | Share in Total Cost (%) |
|---|---|
| Energy (Gas) | 20–25 |
| Raw Materials | 50–55 |
| Labor & Overheads | 10–15 |
| Logistics | 8–12 |
The disproportionate increase in energy costs has significantly altered the cost structure of these units, eroding profitability even in cases where steel prices have remained relatively stable. This imbalance is particularly concerning as it reduces the competitiveness of domestic production at a time when imported steel continues to exert pricing pressure.
5. Production Shifts Toward Coal-Based Routes Are Gaining Momentum
Energy Uncertainty Is Driving Structural Changes in Steelmaking Preferences
As LNG availability becomes increasingly uncertain, there is a visible shift within the industry toward coal-based steelmaking routes, particularly in segments where operational flexibility allows such transitions. Coal-based DRI units, which were earlier considered less efficient and more carbon-intensive, are now regaining importance due to their relative energy security and cost predictability. This shift is not necessarily driven by technological preference but by the need to ensure continuity of operations in an environment of volatile gas supply.
The economics of coal versus gas have also tilted in favor of coal in recent months. While imported coking coal prices remain elevated, their availability has been relatively stable compared to LNG, allowing producers to plan operations with greater certainty. In contrast, the unpredictability of gas supply and pricing has made it difficult for steelmakers to maintain consistent production schedules.
Energy Cost Comparison – Coal vs LNG (Indicative)
| Parameter | LNG-Based Route | Coal-Based Route |
|---|---|---|
| Energy Cost Volatility | High | Moderate |
| Supply Reliability | Low–Moderate | High |
| Emissions | Lower | Higher |
| Operational Stability | Low (current scenario) | High |
This emerging shift toward coal-based production, while addressing short-term operational challenges, raises important questions about India’s long-term sustainability goals. Increased reliance on coal could potentially slow down the transition toward greener steelmaking practices, particularly at a time when global markets are moving toward stricter carbon regulations.
6. Long-Term Implications Point Toward Energy Security Becoming Central to Steel Strategy
Policy, Infrastructure, and Diversification Will Determine Future Resilience
The current LNG disruption highlights a critical structural gap in India’s industrial ecosystem: the lack of assured and stable energy supply for energy-intensive sectors such as steel. While raw material security has traditionally been the focus of strategic planning, the evolving scenario underscores the need to integrate energy security into the core framework of industrial policy. The dependence on imported LNG, combined with exposure to geopolitical risks, makes the steel industry vulnerable to external shocks that are beyond the control of domestic stakeholders.
Addressing this challenge will require a multi-pronged approach, including diversification of energy sources, expansion of domestic gas production, and development of alternative energy pathways such as hydrogen-based steelmaking. At the same time, strengthening LNG infrastructure, including storage capacity and regasification terminals, could help mitigate short-term supply disruptions and improve resilience.
India Energy Dependence Snapshot
| Parameter | Value |
|---|---|
| LNG Share in Gas Supply | ~50–55% |
| Domestic Gas Production Share | ~45–50% |
| Industrial Gas Usage | ~35–40% |
| Steel Sector Exposure | High (specific segments) |
From a policy perspective, there is also a growing need to prioritize industrial gas allocation during periods of supply stress, ensuring that critical sectors such as steel are not disproportionately affected. Additionally, incentivizing energy efficiency and encouraging technological upgrades could help reduce the intensity of energy consumption across the value chain.
The broader implication of the current crisis is clear: energy is no longer a peripheral factor in steel production but a central determinant of competitiveness, stability, and long-term growth. As the industry navigates this transition, the ability to secure reliable and cost-effective energy will increasingly define the trajectory of India’s steel sector in the global landscape.
Conclusion
The ongoing LNG shortage marks a pivotal moment for India’s steel industry, revealing vulnerabilities that extend beyond traditional raw material dependencies. As energy costs rise and supply uncertainties persist, steelmakers are being forced to rethink production strategies, cost structures, and long-term investments. While short-term adjustments such as shifting toward coal-based production may provide temporary relief, the broader challenge lies in building a resilient and diversified energy framework that can support sustained industrial growth. In this evolving landscape, energy security is set to become as critical as resource availability in shaping the future of steel production.
