An asymmetric story: Big steelmakers mint money as smaller ones struggle

Large producers with iron ore mines and export markets are thriving in the current cycle but small ones, with access to neither, are struggling

The steel industry is turning out to be a tale of two halves: the top six steel producers with iron ore mines are in a sweet spot, while the smaller and secondary producers are unable to make good of the commodity boom.

“The steel market is so strong that I should be operating at 100 per cent capacity. But my capacity utilisation is less than 60 per cent due to a huge scarcity of raw material,” said the promoter of a TMT bar manufacturing company that uses the induction furnace (IF) route to make steel.

Steel production in India is dominated by the large integrated steel producers who use iron ore as the basic raw material to make steel primarily through the blast furnace (BF) route. The small, medium and secondary producers generally use sponge iron (produced using the direct reduced iron route) or scrap to make steel through the electric arc furnace (EAF) and IF route. They produce long steel, such as bars, rods and structural, used by the construction and infrastructure sectors.

These latter producers are, however, in a corner because of a supply crunch in iron ore. The problem started with the auctions in Odisha early last year, another TMT manufacturer pointed out.

About 19 mines were auctioned by the state government, and companies agreed to pay a premium of 94 to 150 per cent for captive use and as merchant miners. Steelmakers — JSW Steel and ArcelorMittal Nippon Steel India — also bagged mines in the auction; among top producers — Tata Steel and SAIL — had legacy mines.

“The high premium is unviable for merchant miners and not a single merchant mine is in operation,” pointed out the head of a sponge iron association.  

To ease the supply crunch, secondary producers — who use either lump ore or pellets to make sponge iron — want export duty to be imposed on pellets, similar to high-grade fines that attract a 30 per cent duty.

Runaway prices have added to the worries. Global iron ore prices are at a 10-year high. In the domestic market, NMDC and Odisha miners increased prices 162 to 192 per cent, but this is still at a discount to international prices. Prices of scrap also increased by 115 per cent to $457 a tonne, data by iron and steel research company SteelMint showed.

It’s not just the raw material. Steel prices have surged globally on the back of a demand recovery in China and other economies. As an Edelweiss report put it, the pace of global steel rally has been breath-taking and unprecedented.  

“Fuelled by production cuts in the Hebei region and reduction of export rebates by the Chinese government, steel prices (FOB) in Asia have touched about $1,000 a tonne. In Europe and the US, steel prices have already breached the previously ‘unsurmountable’ highs of 2008,” the report said.

“The steel industry is highly cyclical. If we recall, 2015-16 was one of the most difficult years for the industry when margins fell to unsustainable levels and various trade measures were enforced by countries globally on the steel trade. As a result, there was no availability/appetite for risk capital and new capacities were not created,” pointed out Jayant Acharya, director — commercial & marketing, JSW Steel.

But since July 2020 — after the nationwide lockdown to contain the pandemic — domestic prices have jumped 83 per cent (but still at a discount of Rs 8,000 a tonne to landed cost of imports).

Since the unlocking last year, large steel players ramped up capacity utilisation gradually and are now operating at more than 90 to 100 per cent capacity (see table). But most secondary producers are still hovering at 60-70 per cent.

The share of top six steel producers in crude steel production, which used to hover at 55 per cent, stood at 63 per cent in FY21. 

Jayanta Roy, senior vice president, ICRA, an investment information and credit rating agency, said, “The trend indicates the rising dominance of large steel players in the domestic industry and an adverse impact of the pandemic on the business performance of smaller steel producers including secondary.”

The pandemic has exacerbated the situation in more ways than one. When the lockdown happened, the large steel players stayed afloat by diverting to the export market. But secondary producers are dependent on the domestic market and were practically shut in April 2020 and then restarted from May.

Now, the diversion of industrial oxygen is adding to problems. Liquid oxygen by secondary players is mostly used for welding and cutting. “A very small quantity is required, about 10 cubic metres a day. But it’s like salt in food, without which one can’t do,” said a producer.

The large players either have their own oxygen plants or joint ventures with industrial gas companies to service their plants. They are now on a mission to help resolve the oxygen crisis by ramping up liquid medical oxygen production to meet the spiralling demand following the second Covid-19 surge.   

Secondary producers also need to be mindful of the changes taking place in the marketplace. “The market is changing in terms of product mix. Earlier light weighting was a focus for automotive, now it is taking place in the construction industry as well by using more high strength steels. So more attention is now on modifying the product mix with appropriate technologies,” said Acharya, adding that they will graduate from pure single product plays like TMT to more niche segments.