Long-product steel firms set for windfall gains

Larger steel companies that make long products are set for good times as a severe shortage of iron ore has crimped production and pushed many small players out of the market.

The availability of long products has been reduced following a 12% drop in production of sponge iron, a key input in steel making, during the first nine months of the current fiscal.

The sponge iron, or direct reduction iron (DRI) production has been, in turn, affected by shortage of iron ore and a rise in cost of inputs including power, severely hurting the financial health of the companies making the raw material.

Chirag Shah and Faisal Memon, analysts with Barclays said in a report on March 26, “Supply constraints in the long-product segment are likely to persist because smaller sponge-based producers are facing severe margin crunch. Utilisation levels of several sponge iron players are hovering at 20-50%. We believe this is providing a window of opportunity for large steel companies to take market share.”

But unlike flat steel, the long steel industry in India is fragmented and dominated by a large number of small players.

But a ban on iron ore mining in Karnataka and issues in different other states, most of the smaller players are either operating at lower capacity utilisations or have shut shop.

This has led to a sudden crunch in long product capacity and a dominance of large players which have enough cash to survive and buy costly iron ore from far off states.

So while demand for long products has been steady, the availability has reduced.

However, experts say this pricing power will not be there with manufacturers of flat products as most of the capacity coming on-stream in the next 18 months is in the flat segment.

“All big players in India will add a total flat steel capacity of about 15 million tonne in the next 12-18 months, leading to a glut situation, putting a pressure on pricing,” said Bikash Bhalotia, senior analyst with Pinc Research.

Bhalotia said steel companies had increased prices by Rs2,500 per tonne for flat products and Rs1,000 on long products following a hike in duties in the Budget. He does not see any further rise in flat product prices.

The Barclays analysts said, “Even though the price increases were on the back of the recent increase in customs duties, our sense is that companies are actually offering discounts and, thus, we are less confident that the price increases are sustainable, particularly in flat products.”

Another analyst with an international brokerage said Jindal Steel & Power, SAIL, Tata Steel and Usha Martin are among the companies that will benefit as they have a mixed portfolio of flat and long products.