A double whammy — moderating demand and a fall in steel prices — will impact the performance of the sponge iron, re-rolling steel, and refractory sector in the near term.
Small and medium enterprises (SMEs), which account for 75 per cent of the total capacity of these industries, with key clusters in Chhattisgarh, Odisha and West Bengal, are likely to be impacted the most.
Sponge iron is used by re-rollers to produce long steel such as thermo-mechanically treated (TMT) bars through induction furnaces. On their part, refractory products, which are heat and corrosion-resistant material used mainly in linings for furnaces and kilns, are mainly consumed by the steel sector, which accounts for about 75 per cent of domestic demand.
In the first half of the current fiscal year, long steel production increased 13 per cent year-on-year, and sponge iron production rose 7 per cent year-on-year.
However, moderation in demand led to a fall in steel prices, adversely affecting SMEs. Prices of re-rolled TMT bars fell 10 per cent in the first half of the current fiscal year, and that of coal-based sponge iron fell 18 per cent.
CRISIL Research expects prices to pick up in the second half, as demand improves.
Overall steel demand is expected to moderate to 4-5 per cent this fiscal year, from 8.8 per cent in the last. Weak demand from the automobile and construction sectors has curtailed offtake.
Realisations are also expected to contract, pruning operating profits. And with moderate operational performance eroding net worth, return on capital employed is also expected to shrink. Also, the cash conversion cycle is expected to remain stretched on account of high debtor and inventory days.