A study of 274 secondary steel firms by ratings and research agency Crisil revealed that one in every seven steel companies would be adversely impacted by intensifying competition, in the wake of ongoing capacity expansions by primary steel producers.
The impact will largely be on those operating in south-east India, where most of the incremental capacities are coming up. Secondary steel firms produce steel using induction or electric arc furnaces and dominate the 31-million-tonne (mt) long steel segment of the 62-mt steel market in India.
“These players have small capacities, but collectively command 75 per cent of the steel long products market, given their low logistics costs, access to key raw materials, and superior regional market positions,” said the report.
Primary producers, which use blast furnaces to produce steel, have traditionally focused on flat products, and account for only 7.5 mt of the long products segment.
Over the next four years, however, primary companies, such as Steel Authority of India (SAIL) and Rashtriya Ispat Nigam (RINL), plan to nearly double their finished long product capacities through expansions, mainly in Southeast India.
According to the findings, although the market is expected to grow at 8.5 per cent over the next four years, the capacity expansions by primary players will restrict secondary players to a compound annual growth rate of less than 6.5 per cent (against the 10 per cent in the last three years).
Gurpreet Chhatwal, Director, Crisil Ratings, said: “With primary producers accounting for nearly half of the expected incremental demand of around 12 mt for long products over the next four years, the secondary players’ market share will decline to less than 70 per cent. The capacity expansions in South-East India will lead to overcapacity in the region, and severe volume pressures for players.”
The capacity expansions may impact the credit quality of around 15 per cent of Crisil-rated players, which are mainly based in South-East India, and have non-integrated rolling mills or weak capital structures, the study added.
These mills produce only finished steel products, which have high freight intensity and are therefore dependent on local markets for offtake. Players with leveraged capital structures will also be affected, as a decline in revenue or profitability can considerably constrain their debt servicing ability.
The report also states that fully or semi-integrated players in South-East India with strong capital structures, however, are better equipped to withstand competitive pressures. This is because they have flexibility to switch production to intermediates, which are less freight intensive, and can be sold in other regions as well.
