Slump in steel sector spreads to small, medium companies

A slowdown in India’s steel sector is spreading to medium and small enterprises, with several companies cutting production in response to lower demand.

Such units make up about one-half of India’s total steel production but higher iron ore prices and weak demand have forced many to trim output since August. In some cases, production has been halved.

The steel companies are facing the heat from the slowdown in one of their biggest clients, the automotive industry. Demand for real estate has also been falling in a slowing economy and a liquidity crunch.

“There are no buyers in the market today. Sales are not happening,” said R.K. Goyal, managing director, Kalyani Steel, a Pune-based producer of auto grade steel. The company, which has an installed capacity of 250,000 tonnes per year, has cut production by 25-40% in the last 15 days, Goyal said.

 

Ludhiana-based auto grade steel manufacturer Vardhman Special Steels plans to start cutting production from October, said vice chairman and managing director Sachit Jain. “We were lucky because we already had a scheduled plant shutdown,” Jain said. “The plant has restarted now. We will be producing less than what we anticipated, maybe we will cut by about 30% but I guess we will be cutting less than our competitors.”

An unprecedented slowdown has engulfed India’s automobile industry, the world’s fourth-largest, since July last year forcing automakers and their vendors to cut jobs. Passenger vehicle sales in India plunged 32% year-on-year in August, according to the Society of Indian Automobile Manufacturers (Siam). It was the 10th straight monthly drop in passenger vehicle sales and the worst since Siam began compiling monthly sales data in 1997-98./

Steel prices fell below 40,000 per tonne in July, the first time since December 2017. Jefferies cited this to weak demand led by a slowdown in key sectors (automotives, real estate) and de-stocking by steel mills, pushing them to sell at an 8% discount to imports. In a report, the brokerage also found that inventory at steel mills are now at 14.6 million tonnes (45 days), much higher than the usual 20 days.

“We’ve reduced production over the last 2-3 months. Some people are doing maintenance shutdowns at plants even when it’s not needed. Salaries are being delayed by about 2 months after we started cutting production in July,” said P.V.S. Rao, president, Karnataka Sponge Iron Manufacturers Association, which represents 64 units that depend on iron ore supply from Karnataka.

Rao said that despite a weak market, iron ore prices of state-run NMDC and private miners have remained stubbornly high which is also one of the reasons several sponge iron producers have chosen to scale back production.

“We do about 10,000 tonnes a day of sponge iron production and we’ve reduced it by about 30% in the last two months,” he said.

Even large steelmakers are choosing to cut production.

In August, JSW Steel, the second largest private steelmaker, cut crude steel output by more than 13% from a year ago to 1.25 million tonnes (Mt). JSW attributed the drop in steel production to a planned shutdown at its Vijayanagar plant. In the June quarter, Steel Authority of India Ltd also saw its sales realisations fall despite stable volumes. Sail had to contend with higher raw material prices and rising expenses hurting margins.

Large producers likes JSW are banking on exports to meet their sales targets. To clear their inventories, Indian mills have exported aggressively in August, with exports rising 37% year-on-year, according to Jefferies.

In an interview with Bloomberg last Friday, Seshagiri Rao, Joint MD and Group CFO, JSW Steel, said the company expects to exceed its export target of 2.2 million to 2.4 million tons for the fiscal year as a response to the slowdown in the domestic sector. But small and medium companies, which traditionally supply to the domestic market, are left in the lurch.

Rao, who represents the sponge iron businesses in Karnataka, said that he expects more steel mills to decide by September on whether they should cut production.

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