High cost of production delays recovery of secondary steel companies
“Most of the secondary steel plants are likely to be completely closed and it is a matter of time due to really high manufacturing cost. After the pandemic, the cost of production between an integrated steel plant and the secondary players has widened by around Rs 10,000 per tonne,” stated RK Goel, managing director of Kalyani Steel, one of the highest secondary steel companies in India.
CARE reported that India’s high six built-in steel producers (ISPs) collectively produced 5.9 mt of crude steel out of the overall 9.2 mt in November, up 7.5% on 12 months. By distinction, the output at smaller gamers fell 6%.
Secondary steel gamers continued to report on-year decline in production for the nineteenth consecutive month ended December.
India’s steel making consists of two sectors; built-in major steel gamers contributing almost 55% and the secondary steel gamers comprising the remaining 45%. The ratio isn’t the identical because the industries clamber out of the pandemic-induced contraction.
“Limited scale of operations and weaker financial flexibility to cope with the multiple challenges thrown by the pandemic have further delayed their recovery. Consequently, the share of the six ISPs have gone up to 65% in November 2020 from 62% in November 2019,” stated the report by CARE rankings.
“For secondary steel makers, operating margin will test the lower range of 5.5-6.5%, marking a fall of nearly 100 basis points. This is largely due to the pandemic-driven shutdown in the first quarter of this fiscal, which led to a near-complete shutdown of operations for many producers,” stated Mohit Makhija, Director, CRISIL Ratings.
What led to this?
During the height lockdown interval, major steelmakers had been capable of meet up with the misplaced home demand by exports, which the secondary gamers couldn’t on account of restricted attain and infrastructure.
A secondary steel participant that owns a steel re-rolling mill in Chhattisgarh stated that the rise in steel costs had little or no influence on their profitability because the iron ore price too shot up on the identical time.
“We had labour issues, logistics issues, liquidity crunch during Apr-Sep period. We slowly revived only to get hit by the sharp cost pressure,” the particular person quoted above stated.
The major cause behind the adjustment of costs has been on account of the sharp rise in the principle uncooked materials cost which is iron ore and its general scarcity apart from surging international steel costs. As per Industry physique Indian Steel Association (ISA) rise in sponge iron costs are round 70% and pellets round 104% within the final 6 months.
“Bearing the brunt of the current situation are the smaller steel producers, who are faced with the double whammy of high input prices and non-availability of iron ore. As a result, they are unable to scale up production and stocks in smaller plants are less than 15 days of requirement,” stated Indian Steel Association in a letter to the Prime Minister’s workplace final week.
Kalyani Steel’s Goel added that the secondary steel producers that cater to auto companies, couldn’t enhance costs to an important extent and lengthy product gamers took a hike of round Rs 4,750 per tonne. However, built-in steel gamers elevated it by round Rs 18,000 per tonne.
Light on the finish of the tunnel?
Integrated steel gamers stated that the scenario is more likely to flip round in a pair of months.
“I feel this is quite temporary, maybe today the secondary players are not able to get iron ore and they are also suffering due to lower working capital and liquidity and third, many secondary players do not have the manpower availability,” stated SAIL’s ex-chairman, Anil Kumar Chaudhary.
Several secondary steel companies ET spoke to are looking for a ban on exports of iron ore and iron ore pellets with the intention to carry down their uncooked materials prices.
