Coal shortage may prove a hurdle in the recovery of smaller steel players

Many units in this space expect capacity utilisation levels to drop drastically a few months down the line due to the crunch in the supply of the fossil fuel

Small, medium and secondary steel producers, which account for more than a third of steel production, are at pre-pandemic levels of production in the first five months of the current financial year, but shortage of coal may play a spoiler in the recovery.  

Data from Icra and JPC show production during April-August FY22 in the “other” category (comprised of small, medium and secondary producers) was 17.75 million tonnes (mt), up 45.6 per cent over FY21 and 0.4 per cent over FY20.  Total production was, however, up by 3 per cent compared to FY20 as the large players recorded a 4.6 per cent increase.

The country's crude steel production declined by over 24 per cent year-on-year (YoY) during the first five months of FY2021 because of the national lockdown in the beginning of the year, pointed out Jayanta Roy, senior vice president, ICRA.

“However, medium and small -sized players suffered more as reflected by a sharper 31 per cent production loss during this period. Most of the large players could limit their production loss within a range of 17-24 per cent since they had better financial health to sustain operations, and they could push their produce better in the export markets,” he said.

“In the current year, medium and small-sized players have been able to register a sharp growth rate of over 45 per cent in production due to the base effect. However, compared to the first five months of FY2020, their production level has remained flat, whereas crude steel production of large players has increased by around 4.6 per cent,” Roy added.

Steel production in India is dominated by the large integrated steel producers whose share is at 63 per cent and it has been increasing over the past few years with the consolidation through the Insolvency and Bankruptcy Code (IBC). Typically, it used to be around 55 per cent.

The small, medium and secondary producers generally produce long steel, such as bars, rods and structurals, used by the construction and infrastructure sectors. They use sponge iron (produced using the direct reduced iron route) or scrap to make steel through the electric arc furnace (EAF) and induction furnace (IF) route.  

Till August, everything was fine, pointed out Dinesh Adukia, managing director, Adukia group, which manufactures TMT bars and wire rods. “We are now operating at 90-95 per cent capacity. But we will be out of coal and will be operating at 50 per cent capacity in November-December,” said Adukia.

Another medium-sized player said that his plant was operating at 70 per cent capacity, but from December the scenario would change on account of coal.

Cost inflation, however, is being felt by players across the board. “Input costs are going up, coking coal prices should come down,” said Jindal Steel & Power (JSPL) managing director, V R Sharma. In the last five months, prices of coking coal have more than tripled.

Larger players have, however, been stepping up exports since the domestic market weakened during the second wave of Covid-19. The market has started picking up since the second half of September, but exports continue to be at elevated levels with higher realisations.  

“The domestic market is good, but the international spot market is better,” pointed out Sharma. Further, supply cuts by China are expected to open up markets for Indian steelmakers.