Large steel players stage recovery in August while MSMEs are in distress

At the same time, smaller steel producers have had to cut production in the face of higher input costs and a severe lack of raw materials.

Last week, TV Narendran, managing director and CEO, Tata Steel said the country’s largest private steelmaker is operating again at 100% of its capacity for the first time after the covid-19 lockdown. JSW Steel, the second largest producer, has reported 15% growth in its production of flat steel products at 9.8 lakh tonnes in August while overall crude steel production in August rose 5% year-on-year and 6% from the previous month to 13.17 lakh tonnes. Jindal Steel & Power Limited recorded domestic steel sales of 6.25 lakh tonnes in August, growing 18% month-on-month and 37% year-on-year.

“According to our estimates, steel demand will fall by about 20-21% this calendar year compared to 2019," Arnab Hazra, deputy secretary general, Indian Steel Association, told Mint. “Last year, the domestic demand for finished steel was about 102.6 million tonnes (mt) and this year it is expected to be around 81-82 mt. From January to June, we already lost about 15.3 mt of demand; we expect that from July to December, demand will fall by another 5-6 mt compared to 2019."

Even as the overall steel demand is expected to fall, large integrated players (who have captive iron ore mines, downstream facilities and easier access to export markets) are increasing production, indicating that the medium and small-scale producers are the ones impacted the most by the pandemic.

“There is a severe scarcity of raw material in the open market and iron prices have shot up. Integrated steel producers are safe from the price rise," Ramana Kumar, secretary, Karnataka Iron and Steel Manufacturers Association, told Mint. “Because of this, a reduction in manpower and problems with liquidity, secondary steel producers have cut down their production."

RK Goyal, managing director, Kalyani Steel, said that small steel producers who depend on electric arc furnaces have been hit hard by oxygen supply coming to a stop. Large steel producers use blast furnaces. “Many states are now prioritising oxygen supply for hospitals. So steelmakers without a captive oxygen plant are going to be in severe distress," he added.

There is a significant shift in demand patterns in July and August compared to the first quarter of the fiscal.

Long steel products, which go into building and construction sectors, were expected to lead the industry’s recovery. However, with the private sector almost completely bowing out of any investment in construction and real estate and the monsoon halting most construction work, flat steel production has stepped up to replace this.

The demand for flat steel products is driven from consumer segments like automotive and domestic appliances. While the demand from these sectors had almost completely crashed in May and June, they are now beginning to bounce back for the large listed players.

The trend is also borne out in data from the Society of Indian Automobile Manufacturers which recorded a 50% fall year-on-year in the wholesale dispatches of passenger vehicles to 1,05,617 units in June. However, the most recent numbers for August show that passenger vehicle wholesales grew 14.16% year-on-year to 2,15,916 units.

“We’re seeing strong demand from the auto sector," Sachit Jain, vice-chairman and managing director of Vardhman Special Steels, a Ludhiana-based auto grade steel manufacturer told Mint.

“The rural economy is doing well so we’re seeing demand for tractors. In cities, the spread of covid-19, the need for social distancing, and the fact that there is limited availability of public transportation is forcing customers to look at personal mobility. So we’re seeing demand for motorcycles and entry-level cars pick up."

Confident of the recovery in demand, large steel companies hiked domestic prices for the third month running in September. Prices of hot-rolled coils (HRC), a product that can be further processed into for use in transport, construction, shipbuilding, capital goods, energy pipelines, etc, are a key indicator of steel demand sentiment. Prices have risen from ₹36,000 a tonne in July to ₹40,500 in early September, keeping in line with rising prices overseas, but still below their pre-covid levels of ₹42,000 a tonne.