Steel capacity utilisation levels set to drop further to 74-75% in FY21

Increase in the number of secondary steel units, despite production of the alloy remaining stagnant, is leading to lower capacity utilisation in the domestic steel industry. This is despite the long-term steel demand scenario remaining positive. 

Capacity utilisation in the domestic steel industry has declined to 77 per cent in FY20 from 88 per cent in FY11. The utilisation levels have been gradually sliding and, in fact, are expected to decline further to 74-75 per cent in the current fiscal year. 

“The secondary producers are playing spoilsport since they shut their small-sized units if their input cost goes up or demand comes down. Units with induction furnaces have that flexibility. However, this causes a drop in utilisations of the industry,” Sushim Banerjee, director-general, Institute for Steel Development & Growth told Business Standard.

Fitch Ratings expects steel demand to fall by around 10 per cent in FY21. Steel’s exposure to real estate is lower than cement, with sectors other than construction and infrastructure accounting for around 40 per cent of the overall demand, it said in its recent report.

“Moderation in demand growth along with steady capacity additions to the tune of 60-65 million tonnes over the last decade (2010-2020) led to a gradual fall in utilisation levels in the sector. Operating levels are expected to fall to 74-75 per cent in the current fiscal. This is just above the historic lows seen in FY16,” said Isha Chaudhary, director at CRISIL Research.

Capacity for domestic crude steel production expanded from 109.85 million tonnes in 2014-15 to 142.24 million tonnes in 2018-19, a compound annual growth rate (CAGR) of 6.8 per cent during this five-year period, according to the ministry of steel website.

According to Joint Plant Committee data, finished steel production in FY20 stood at 102 million tonnes, up 0.8 per cent from the previous year. Consumption in the period under review stood at 100.06 million tonnes, up 1.4 per cent from the corresponding period last year.

“In FY20, of the 77 per cent industry utilisation, large steel players have maintained 100 per cent capacity utilisation levels while the small secondary steel producers’ segment has shown 50-60 per cent,” added Banerjee.

The secondary steel producers make up nearly 47 per cent of the total domestic steel industry and hence play a crucial role in maintaining capacity utilisation level along with supply and pricing scenario.

Tata Steel, JSW Steel, Jindal Steel & Power and AM/NS India are among the large organised private producers of steel in the country along with state-owned Steel Authority of India and Rashtriya Ispat Nigam.

Unavailability of raw material such as thermal coal, iron ore and increased power rates led to the small players shutting units from time to time, creating ripples in the market, said industry experts.

“Despite the steep government targets, only 20-22 million tonnes of capacity is expected to be added in the next five years. With demand growth picking up from the next fiscal, operating rates are expected to rise above 80 per cent over the next five years. Further, majority of the new additions are by large players who are already operating at significantly higher levels. These players would continue to operate at healthy levels by exporting any excess production during weak demand scenarios, as witnessed in current fiscal, said Chaudhary.

Though the secondary steel producers contribute sizeably towards total annual steel production, the quality of the product is not in line with steel produced via blast furnace. Due to this, these producers cater to a market, which is not quality conscious but price sensitive.