MSMEs in steel sector get an India build-out lift: CRISIL SME Tracker

Micro, small, and medium enterprises (MSMEs) in the steel sector are poised for rapid growth on the back of robust demand from the infrastructure and building and construction segments.

An upswing in infrastructure spending, coupled with the government’s push to achieve multiple project targets ahead of the general elections in 2024, is driving this demand.

MSMEs in the steel sector mostly manufacture long steel products such as rebars and wire rods using induction-based furnaces and raw materials such as steel scrap and sponge iron.

Most of the sponge iron players import low-ash thermal coal to produce sponge iron. Hence, thermal coal has a material bearing on sponge iron prices. The European energy crisis on account of the Russia-Ukraine conflict had pushed thermal coal prices to record levels last fiscal. With the energy situation improving, prices have begun cooling. Sponge iron prices have followed a similar trend, mirroring the prices of South African-origin thermal coal.

SMEs constitute 33-35 per cent of India’s crude steel capacity. They increased capacity by a significant 11 per cent on-year last fiscal.

This fiscal, healthy domestic demand, along with declining raw material prices, will keep their profit margins positive and utilisation levels high. However, next fiscal, as spending and the pace of project execution decline due to state and central government elections, demand is expected to fall.

An increase in operational capacity and the slump in demand next fiscal will prompt market players to offer products at competitive prices. Consequently, their margins may shrink.

Reduced steel price volatility will enable steel rerollers and traders  to attain improved margin visibility. Inventory levels and working capital will also be healthy. However, higher capital rates and inflationary pressures will increase operational costs.