The mandatory norms pertaining to steel product quality, to take effect next month in a central government order, will affect the profitability of semi-finished product makers. They’d have to make the changes at extra cost amid poor demand.
The Steel and Steel Products (Quality Control) Second Order, 2012, issued in March, says long and flat steel makers need a Bureau of Indian Standards (BIS) licence from September 12. So do foreign suppliers of these goods.
Though the order applies to only finished steel products, secondary steel makers, which provide the semi-finished steel, have to make the changes at their end, too, to make the final product conform to the quality norms.
"The secondary steel industry is very unorganised, as most induction furnaces use simple, crude methods to produce billets and ingots. With the new norms, we will have to provide training to our workers and need to invest more in refining the molten metal to achieve BIS quality. This is difficult for us,” said Sanjaya Sharma, owner of AKS Alloys, based at Chennai.
Refining of the molten metal would require more consumption of ferro alloys and power, putting more burden on cost of production and investment in technical training, amid poor demand for billets and ingots, he added. Billet and ingot prices have come down by a little over Rs 3,000 per tonne in the past two months, to trade at Rs 31,000-32,000 per tonne, depending on grades and sizes. These are semi-finished, long steel products, mainly sold by smaller plants to larger ones for producing long steel, meant for construction.
Construction activity is now dormant due to muted earnings growth, high interest rates and the monsoon season.
Besides investing on refining of the metal, the induction furnaces also need to require more scrap or sponge iron to achieve the BIS standard. Though prices of both these inputs came down last month amid poor demand, secondary steel makers said the rush to buy these items would certainly support the prices. "Though the prices of sponge iron and scrap are under pressure, there is hardly any availability, which is why their prices have not fallen. Sponge iron production has dropped due to lower availability of iron ore and scrap supplies are down due to poor manufacturing activity,” said Paban Bansal, head of the Rajasthan chapter of the All India Induction Furnace Association.
Induction furnaces use locally manufactured-sponge iron or imported and Indian scrap to produce secondary steels, which account for about half of India's total yearly production capacity of 88 million tonnes.
In the first week of August, the Indian HMS scrap index that indicates the mixed price of Indian and imported scrap, went up from 88.11 to 88.77, on anticipation of demand. Sponge iron makers have also said the prices, which track trends in scrap, would remain firm in the next couple of months.