Domestic steel makers, reeling under a raw material crunch, are feeling the heat of rising imports, aided by free-trade agreements (FTAs) with countries like Japan and South Korea and export rebates given by China which makes its exports cheaper. The worst-affected are the secondary steel makers producing through the induction furnace route in Karnataka, Odisha, and West Bengal.
''The threat of imports is a major concern; the first five months of this fiscal saw a 40 per cent spurt in imports. Demand is slowing down in China and Japan. Imports at concessional duties, under FTAs, is hurting Indian steel-makers,'' says the chief executive officer of a steel maker, who did not want to be identified.
Consider this: If steel is imported from Russia, it attracts a customs duty of 7.5 per cent, but if the same is imported from Japan or South Korea, it attracts a duty of 3.1 per cent. Domestic steel makers say this differential is hurting them. Besides, China offers an export rebate of 9-13 per cent. This makes Chinese steel cheaper by $72 a tonne, if one takes the ruling international prices of HR coils at $550 a tonne.
"Policy provisions related to concessional import duty to items from South Korea and Japan under CEPA is also instrumental in a significant growth in imports from these nations, currently in slowdown mode with supply outstripping demand," the Joint Plant Committee (JPC), Ministry of Steel, said last week while releasing the import statistics. Price consideration is another crucial factor influencing trends in imports with the relative strength in domestic prices vis-a-vis import prices, the JPC added.
Distress is building
The rising imports and poor demand have added to the troubles of the secondary steel producers, who were already crippled by a severe raw material crunch (iron ore) and rising cost of power. ''In Karnataka, several secondary steel makers who produce steel through the induction route have shut shop,'' says an industry expert. There are reports of several units shutting up in Jharkhand, Odisha and West Bengal.
No wonder, iron and steel companies had the largest chunk of debt that has been referred to the corporate debt restructuring (CDR) cell as on June 30, 2012. Thirty four of these companies which are in the CDR cell had an aggregate debt of Rs 39,714 crore, accounting for 24 per cent of the total debt that is being restructured. The quantum of the debt could increase if imports increase in the same pace.
Take the situation in Karnataka. Secondary steel makers, producing through highly energy-intensive induction furnace route, are mainly concentrated in and around Bangalore in Karnataka. Today, there are hardly four-five induction furnaces in operation in Karnataka against 15-20 units about 15 years ago. In south India, Karnataka was the only state to produce steel through the induction furnace route and today, it is on the verge of losing its presence. The installed capacity has declined from about 500,000 tonnes per annum to less than 5,000 tonnes per month.
There are some new projects in the pipeline, expected to come up in Bellary district. Steel makers producing through the induction furnace route mainly make ingots and billets for the construction industry and castings for engineering industries. Other steel producers like JSW Steel, BMM Ispat, MSPL and Xindia are among those that use sponge iron and pellets for their furnaces apart from scrap metal.
The main reason why these units have shut down is the high cost of power, as well as shortage of power. The units have migrated to neighbouring Tamil Nadu and Andhra Pradesh. Another major problem faced by these units is shortage of iron ore. Some of the units use sponge iron as raw material, while a majority of them use scrap metal to produce castings, ingots and billets.
"During the last six months, the market has been very bad for us. There has been some large scale import of finished steel products from Ukraine, which has impacted demand for our products in the domestic market," a senior official from Bhuwalka Steel said on condition of anonymity.
The executive alleged a global steel major has opened a marketing yard in India and is dumping imported material in the domestic market. "The condition is no different in Tamil Nadu and Andhra Pradesh as regards to power. There are severe power cuts in Andhra Pradesh. Some of the units, which have migrated from Karnataka, are now desperate to sell off their business," he said.
The units have shifted out of Karnataka mainly due to high cost of power, which was Rs 1 per unit more than Tamil Nadu and Andhra Pradesh. In the last three to four years, the power shortage has been acute in Karnataka, mainly in the tier-2 and tier-3 cities. These units are more viable when demand is strong and steel prices are high; and the units are shut down if steel prices are low and there's not enough margins.
Currently, steel produced through the induction route is being sold in Karnataka at Rs 33,000 per tonne, a rise of about Rs 3,000 per tonne compared to three years ago. But raw material prices have also gone up. While scrap metal is being sold at an average of Rs 25,000 per tonne, power prices have gone up. The induction furnace units can make profit if they can sell at Rs 35,000 per tonne, and make a profit margin of Rs 2,000 per tonne.
The cost of power has gone up by an average of Rs 1 to 1.50 per unit in Tamil Nadu, where a large number of units are functioning. The cost of power is Rs 5 per unit in Tamil Nadu. According to a senior executive at Bhuwalka Steel, the induction furances, as an industry, are dying in the country as there is not much of demand. Moreover, major steel players like JSW Steel and BMM Ispat are also using scrap metal for the steel making, though not in big quantity.
Battle for Odisha units
There are 100 electric arc/ induction furnace units in Odisha with a combined steelmaking capacity of 0.3 million tonne a month. While about 50 per cent of them have shut in the last one and half years, the rest are operating at a reduced capacity of 10 to 15 per cent.