Domestic steel-makers, already reeling under a raw material crunch, are feeling the heat of rising imports, aided by free trade agreements with countries like Japan and South Korea and export rebates given by China, which makes its steel exports cheaper. The worst affected are the secondary steel makers producing through the induction furnace route in Karnataka, Odisha, and West Bengal.
‘‘The threat of imports is a major concern; the first five months of this fiscal saw a 40% spurt in imports. Demand is slowing down in China and Japan. Imports at concessional duties, under FTAs, is hurting Indian steel-makers,’’ says the CEO of a steel maker, who didn’t wish to be identified.
Consider this: if steel is imported from Russia, it attracts a customs duty of 7.5%, but if the same is imported from Japan or South Korea, it attracts a duty of 3.1%. Domestic steel-makers say this differential is hurting them. Besides, China offers an export rebate of 9-13%. This makes Chinese steel cheaper by $72 a tonne, if one takes the ruling international prices of HR coils at $550 a tonne.
"Policy provisions related to concessional import duty to items from South Korea and Japan under CEPA is also instrumental in a significant growth in imports from these nations, currently in slowdown mode with supply outstripping demand," the Joint Plant Committee (JPC), Ministry of Steel, said last week while releasing the import statistics. Price consideration is another crucial factor influencing trends in imports with the relative strength in domestic prices vis-a-vis import prices, the JPC added.
Distress is building
The rising imports and poor demand has added to the troubles of the secondary steel producers, who were already crippled by a severe raw material crunch (iron ore) and rising cost of power. ‘‘In Karnataka, several secondary steel producers who produce steel through the induction route have shut shop,’’ says an industry expert. There are reports of several units shutting up in Jharkhand, Odisha and West Bengal.
No wonder, iron and steel companies had the largest chunk of debt that has been referred to the corporate debt restructuring (CDR) cell as on June 30, 2012. Thirty four of these companies who are in the CDR cell had an aggregate debt of Rs 39,714 crore, accounting for 24% of the total debt that is being restructured. The quantum of the debt could increase, if imports increase in the same pace.
Take the situation in Karnataka. Secondary steel-makers, producing through highly energy-intensive induction furnace route, are mainly concentrated in and around Bangalore in Karnataka. Today, there are hardly 4-5 induction furnaces in operation in Karnataka as against about 15-20 units about 15 years ago. In South India, Karnataka was the only state to produce steel through the induction furnace route and today, it is on the verge of losing its presence. The installed capacity has declined from about half a million tonnes per annum to less than 5,000 (five thousand) tonnes per month.
There are some new projects in the pipeline, expected to come up in Bellary district. Steel-makers producing through the induction furnace route mainly make ingots and billets for the construction industry and castings for engineering industries. Other steel producers like JSW Steel, BMM Ispat, MSPL, and Xindia are among those that use sponge iron and pellets for their furnaces apart from scrap metal.
The main reason why these units have shut down is the high cost of power as well as shortage of power. The units have migrated to neighbouring Tamil Nadu and Andhra Pradesh. Another major problem faced by these units is shortage of iron ore. Some of the units use sponge iron as raw material, while majority of them use scrap metal to produce castings, ingots and billets.
“During the last six months, the market has been very bad for us. There has been some large scale import of finished steel products from Ukraine, which has impacted demand for our products in the domestic market,” a senior official from Bhuwalka Steel said on condition of anonymity.
The executive alleged a global steel major has opened a marketing yard in India and is dumping imported material in the domestic market. “The condition is no different in Tamil Nadu and Andhra Pradesh as regards to power. There are severe power cuts in Andhra Pradesh. Some of the units, which have migrated from Karnataka, are now desperate to sell off their business,” he said.
The units have shifted out of Karnataka mainly due to high cost of power, which was Rs 1 per unit more than Tamil Nadu and Andhra Pradesh. In the last three to four years, the power shortage has been acute in Karnataka, mainly in the Tier-2 and Tier-3 cities. These units are more viable when demand is strong and steel prices are high; the units are shut down if steel prices are low and there’s not enough margins.
Currently, steel produced through the induction route is being sold in Karnataka at Rs 33,000 per tonne, a rise of about Rs 3,000 per tonne compared to three years ago. But raw material prices have also gone up – while scrap metal is being sold at an average of Rs 25,000 per tonne, power prices have gone up. The induction furnace units can make profit if they can sell at Rs 35,000 per tonne, and make a profit margin of Rs 2,000 per tonne.
The cost of power has gone up by an average of Rs 1 to 1.50 per unit in the state of Tamil Nadu, where a large number of units are functioning. The cost of power is Rs 5 per unit in Tamil Nadu. According to a senior executive at Bhuwalka Steel, the induction furances, as an industry, are dying in the country as there is not much of a demand. Moreover, major steel players like JSW Steel and BMM Ispat are also using scrap metal for the steel making, though not in big quantity.
Battle for Odissa units
There are about 100 electric arc/induction furnace units in Odisha with a combined steelmaking capacity of 0.3 million tonne per month. While about 50% of them have shut shop in the last one and half years, the rest are operating at a reduced capacity of 10 to 15 percent. Unlike the secondary steel manufacturers in the western part of the country who mostly depend upon scrap as feed for their units, the induction furnaces in the state use pig iron and sponge iron to produce steel. More than the increase in power tariff or import of cheaper of steel, the secondary steel makers in the state have been hit hard by non-availability of raw material.
“Tempted by boom in the metal market, a number of sponge iron and induction furnace units had sprung up in the last few years to harness the rich deposits of iron ore in the state”, says Purushottam Kandoi, president, All Odisha Steel Federation. But their hopes have been dashed as on one side, the metal market seems to be on a slide and on the other, the availability of iron ore for sponge iron and pig iron units has dried up due to government restrictions on mining activity, following allegations of illegal mining and clamp down by environment protection authorities.
About 50 of the 104 sponge iron units and half of 6 pig iron making units have closed down for want of iron ore and environment issues. This has hit supply of inputs to the induction furnaces which are now facing a tough time to keep afloat, Kandoi pointed out. “Unless the government removes the bottlenecks in supply of raw material to these industries, all the secondary steel units will shut their plants in the state”, he warned.