Smaller steel producers trail top six players in scaling up production

Shortage of iron ore, spike in input costs are the major impediments

It’s not just elevated iron ore prices and uptick in demand that’s driving steel prices, there is a drop in availability led by challenges faced by smaller steel producers.

Even though demand has picked up and the market is buoyant, smaller steel producers – most of which are secondary – have not been able to scale up production. The factors are more than one: there is a shortage of iron ore and input costs have risen sharply over the past few months.

A secondary producer explained that there was a problem with availability of iron ore and prices. “Prices have skyrocketed in the past one month. My stocks have come down to 30 days against a normal level of 60 days; margins have dropped from 8-9 per cent to 1-2 per cent,” he said.

Domestic iron ore prices have more than doubled in Odisha since end-June due to the shortage led by mines auction earlier in the year at a huge premium. It has largely made the mines unviable. Of the 19 mines auctioned, seven have started production.

 

An Icra analysis indicated that the supply shortage in the current fiscal could be over 50 million tonnes and the shortage scenario could persist for the next 6-9 months, unless new miners were able to quickly ramp-up production.

The smaller steel producers account for about 40 per cent of production; the balance is accounted for by six major steel producers: Tata Steel, Steel Authority of India Ltd (SAIL), Rashtriya Ispat Nigam Ltd (RINL), Jindal Steel & Power and JSW Steel. Except RINL, most of the other players have some level of raw material security.

JSPL managing director, V R Sharma, said, there is no shortage in flat steel. “But long steel is in short supply because secondary producers are unable to produce. This has created a shortage in long products and is one of the factors driving steel prices. The shortage in iron ore and an increase in its prices and other inputs like pellets and scrap are putting pressure on secondary producers,” he said.

Prices of steel have had quite a run since the easing of lockdown measures. Domestic hot rolled coil (HRC) are at a multi-year high of Rs 49,000 a tonne; in longs, rebars too would be around the same level.

The increase in steel prices is in line with international trend, though. “In China, prices have increased by about $30 a tonne in the last month,” pointed out Sharma.

China is seeing a healthy growth in consumption led by infrastructure. World Steel Association (WSA) has, in fact, revised its demand growth forecast for China to 8 per cent for CY2020 against a previous forecast of one per cent in April 2020.

In India, according to Joint Plant Committee’s provisional data, during April to November, production of top six steel producers showed a decline of 18.7 per cent and that of “others” by 20.9 steel, year-on-year; consumption was down by 20 per cent.

 

The provisional data for November, however, show a decline of 8.3 per cent for “others” while total production was down by 2.4 per cent. Consumption, on the other hand, increased by 11.4 per cent.

“This implies that among the top six, most had recorded an increase. With most secondary producers not being able to scale up, there is reduced availability and that too is fueling an increase in prices,” a primary producer said.

The ICRA report noted that the share of top six steel producers in total crude steel production, which remained at about 55 per cent historically, had risen to 65 per cent in recent months. Also, as against the average industry capacity utilization of 78 per cent for the last five years, the same for the top six steel producers has now touched a high of 85 per cent in October 2020, while other steel producers were still operating at capacity utilization rates of about 65 per cent.

“These trends indicate the rising dominance of large steel players in the domestic industry and an adverse impact of the pandemic on the business performance of some of the smaller steel producers, which would find it difficult to operate at pre-Covid levels in the near term,” the report said.

Top six steel producers versus the rest:
 

• Share of top six steel producers rose from 55 per cent to 65 per cent in recent months
• Their capacity utilization touched 85 per cent in October from an average of 78 per cent in the past five years
• Other steel producers operating at 65 per cent