Secondary steel producers, which account for almost 60 percent of India’s steel industry, and mid and small scale plants are cutting back on the output to cope with a demand slump at home.
In the iron ore-rich district of Ballari in Karnataka, at least eight plants that include secondary steel makers like BMM Ispat, Rayen Steel, PGM Ferro Steel and companies such as Mukand and Kalyani Steels— primary suppliers to the auto sector — have scaled back production. Subdued construction demand is also a trigger for such cutbacks.
Mukand's Hospet (Karnataka) facility has scaled back production by about 15-20 percent in the last three months. Inventories have increased substantially over normal levels, Mukand said. Kalyani Steels has had to cut production by as much as 40 percent over the same period, said a company official on the condition of anonymity. Many producers said more cuts could be in the offing if demand does not improve.
However, India's oldest steelmaker Tata Steel expects demand to pick up in the festive season of the second half of the year and said it will not cut production anytime in the near future. Secondary steel makers that use scrap to produce sponge iron and pellets do not share the same optimism.
Deependra Kashiva, executive director at the Sponge Iron Manufacturers Association said, “Standalone plants producing sponge iron and pellets and with capacity, less than 0.2 million tonnes have been badly affected. However, other plants like Tata Long Products (former Tata Sponge Iron) and Godawari Power and Ispat that produce more of value-added products can survive the slowdown.”
To be sure, sponge iron plants use the electric arc furnace (EAF) or induction furnace methods that make it easier to modify production, unlike the blast furnace route employed by big steel players like JSW Steel, Tata Steel, SAIL, Essar Steel
The bigger companies are working on inventory management and newer export destinations to cope with fall in local demand.
Ranjan Dhar, chief marketing officer at Essar Steel said, “Domestic demand has to improve as export opportunities are also shrinking. The industry will not be able to wait for more than one more quarter before deciding to take production cuts.” Construction demand typically slows in the monsoon quarter, and this season has been among the rainiest, with at least nine states seeing repeated instances of flooding. According to an industry source, JCB, that produces earthmoving equipment for construction, had sold close to 5,500 machines last year during the period between July and August, while this year it sold only 1,500 machines.
According to Tata Steel, the silver lining is that China is no longer disrupting global markets and is exporting only 5 million tonnes per month. With the scale, raw materials and latest plant and technology that Indian companies possess, they are “structurally in a stronger position”, it said.
“Stock prices reflect that Quarter 2 will remain forever but that is not the case. In Quarter 2, there was a problem of contractors not getting working capital for state and central projects, which is why construction activity slowed down.” said Ritesh Shah, lead analyst for materials at Investec Securities.
Shah added that as the anti-dumping duties kick in, imports will reduce and locally produced steel will replace the imported quantity.