Struggling to remain afloat amid inadequate raw material supplies, high power and transportation costs and inadequate access to finance, India’s secondary steel producers are ceding their share in the country’s steel production. Their share in domestic steel output was 55% in 2015; in FY22, they produced just 40% of the country’s overall steel production of around 140 million tonne (mt).

Recognising the importance of their role in the ambitious capacity-expansion target — 300 mtpa in 2030-31 and 500 mtpa India’s 100th year of Independence in 2047 — the government is now formulating a policy meant exclusively for them. Its broad contours are drawn by the steel ministry.

The government, however, is not optimistic about any rise in their share in overall output beyond the present 40% in the ambitious long-term capacity building targets, even as their cumulative production may remain unchanged going forward. India, a net exporter of steel, is world’s second largest producer of the alloy after China.

The decline in downstream steel units’ share in production is primarily because of constant decline in their capacity utilisation level. It was alarmingly low at just 50.35% during the April-December period of the current fiscal, according to government’s estimate. Those make crude steel mostly through the induction furnace and electric arc furnace routes are utilising 55% of their capacity.

The units which make finished steel like re-rollers are struggling at 46%, nearly at a half-way mark of the ideal level of 90% for a manufacturing sector. Value-adders like cold-rollers, makers of tinplate, pipes, colour-coated steel are reporting even lower capacity utilisation of 37%. Sponge iron and pellet makers’ capacity utilisation is at 54% now.

The Covid-induced lockdown impacted production of the big six integrated players also, but they have recovered remarkably once the pandemic abated. While even bigger steelmakers of the country rely on imported coking coal, secondary producers are largely dependent on imported thermal coal as they are unable to participate and succeed in the auctions. They don’t get adequate supply of iron ore as well, so the volatility in input prices, like the current one, hurts them the most.

Production of stainless steel gets hampered because their key ingredients like nickel are imported due to domestic non-availability. Tariff concessions to countries with which India has free trade agreements (FTAs), like Japan and Korea, also put secondary steel producers under pressure.

Anil Nachrani, president, Chhattisgarh Sponge Iron Manufactures’ Association, said Coal India should allocate 15% of its production to secondary steel producers from the current level of 5%. Coal mines should be given to the secondary steel producers in consortium. Also, apart from ensuring iron ore supply, the government should impose export duty on pellets to safeguard the interest of the secondary steel producers.

Most of the secondary steel producers run with obsolete technologies. As a result, they end up spending over `1,000-2,000 more for each tonne of production compared with their bigger brothers, for the same product with matching quality. In the absence of required technologies such as ladle refining facilities, they are unable to ensure quality, which does not meet standards (BIS) often and in turn, hurt consumers.

Their freight cost is as high as it is for power. They lack professional management, skilled manpower and proper marketing supports.

Most units in the secondary sector are family-run, small-sized and not rated by rating agencies. Poor corporate governance is also an issue. As a result, banks are rather reluctant to extend loan facility to them fearing piling up of NPAs again.

The situation is such that sans a spate of consolidation among a total of 2,500 of them, their survival will be at stake. They need to scale up, produce the right quality, green steel acceptable to all, even in the export market where their exposure is minuscule. They need to team up among peers to acquire modern, up-to-date machineries quickly. India has enough opportunity to provide secondary steel producers, said VR Sharma, MD, JSPL, a company targeting 50 mtpa capacity in the long run.

Secondary steel producers are not on the radar of the big companies for acquisition. Their small size, ranging from as low as 1 lakh tonne production capacity per annum, does not fit into their plans. The cost of acquiring them and converting them into profit-making ventures would be very high. They are also scattered across the country. Helping them to form clusters is one of the demands of the industry from the government.

Being small also has some advantages. They need less capital investment; they are co-located with the consumers to meet the demand in both urban and rural areas with their niche tailor-made products. They generate local employment and do not generally face local problems.

The proposed policy of the government on secondary steel producers is likely to address some of the issues impeding their operations.

Strengthening institutional support for research & technology, supporting R&D effort, excluding some items they produce from the purview of the quality control order, bringing amendment to the MMDR Act to ensure availability of iron ore to sponge iron and pellet manufacturers are under active consideration of the government, sources said.