Refractories, sponge iron, re-roller SMEs to piggyback steel demand: CRISIL

CRISIL Research expects the business outlook of small and medium enterprises (SMEs) in the sponge iron, refractory materials, and re-rolling mill sectors to improve in the near-term, following a revival in both demand and prices of steel.

SMEs comprise a massive three-fourth of these industries, the majority of which are located in Chhattisgarh, Orissa and West Bengal. They were hammered when steel prices had declined in the past.

While sponge iron is used as raw material by re-rollers to produce long steel or TMT bars through induction furnaces, refractory materials are used in the linings of furnaces, kilns, and reactors to protect against high temperature and pressure.

Long steel demand grew 3.7 per cent in fiscal 2018. Momentum in the infrastructure sector is expected to take this number up even further in the near-term, benefiting SMEs.

The steel segment is the largest consumer of refractory materials, accounting for 75 per cent of total domestic demand. 

CRISIL Research expects steel demand to increase seven to eight per cent this fiscal.

But intense competition and the threat of substitutes such as scrap steel are key monitorables for sponge iron players, while the threat of imports, low-quality raw materials, and competition from global players are key risks for refractory materials makers.

Business outlook, returns, working capital and asset quality in the sector are the factors to be considered when lending to SMEs.

Please refer to CRISIL Research’s SME Report, 2018, for details on the risk-return attractiveness in SME lending across 73 sectors and 157 clusters.