Squeezed between high raw material and range-bound steel prices, secondary and mini-producers of steel have reduced their operating capacity by half in the past month. Although steel mills have revised product prices more than once recently, they’ve failed to pass the proportionate increase in raw material prices fully to consumers.
As a consequence, not only have margins of secondary and mini steel mills fallen to unsustainable levels of between one to five per cent. The supply of steel long products such as ingots, billets, TMT Bars and re-bars, used in infrastructure and construction sectors, has also become tight.
Long steel is a fragmented market and the producers are induction furnace-oriented. With the current level of raw material prices, they lack working capital. “If you go around many pig iron producers across India, you will see that they cannot buy coal and iron ore at current prices,” said Koushik Chatterjee, group CFO of Tata Steel. “There is scarcity because these smaller players have gone out of the market suddenly.” The larger players were unaffected, he said, and it was the smaller and scattered units that faced the brunt of the volatility in prices.
Inputs soar
Today, the most traded shredded scrap raw material for secondary steel makers rose by Rs 4,000 per tonne to Rs 26,900 per tonne at Mandi Gobindgarh in Punjab, the country’s biggest metal trading hub. Shredded scrap of European origin is traded at $450-460 per tonne, with analysts believing it would rise to $550 per tonne soon. Similarly, iron ore prices have surged to $188 per tonne (cif) for delivery on Chinese ports. Coking coal is currently pegged at $260-280 per tonne, with a likelihood of $300 per tonne in the near future, due to supply shortage from flood-hit Australia.
Half of India’s 60 million tonnes of annual output is produced by the secondary steel players. The primary producers — SAIL, Tata Steel, JSW Steel, Essar Steel, etc, contribute the rest. Inducation furnaces in Mandi Gobindgarh are operating at even less capacity, due to hardly 12 hours of electricity supplied daily by the state government. The government has asked these high electricity consuming mills to import power from neighbouring states to run their business. Rolling mills in the region, however, are working fine.
A JSW Steel official said, “Availability of long steel is restricted, as 55-60 per cent of the production comes from secondary producers and scrap prices are very high right now.” The official said it was not viable for the secondary makers to manufacture steel at the current raw material prices. “That is why they are affected.”
Post-monsoon construction activities are in full swing, with upbeat demand of steel longs. Hence, the shortage may help primary producers raise prices again in the near future.
Anil Suraj, a ferrous metal analyst in Mandi Gobindgarh, said, “Secondary steel producers are suffering in this region due to acute power shortage. Steel makers of the north majorly use scrap, sponge iron and power to make long steel and as power is a big issue, most of the units are either shut or are running dangerously low on capacities.”
