Competition heats up for secondary steel players
Executive Summary
CRISIL’s study of its rated portfolio of 274 secondary steel players reveals that the credit risk profiles of one in
every seven secondary steel players1 will be adversely affected by intensifying competition, in the wake of large,
ongoing capacity expansions by primary steel producers. Over the next four years, primary players, such as Steel
Authority of India Ltd (SAIL) and Rashtriya Ispat Nigam Ltd (RINL), plan to aggressively expand and nearly double
their finished long product capacities through brownfield expansions. The majority of the incremental capacities
are coming up in South-East (SE) India. The impact will, therefore, be largely felt by players operating in this
region, particularly non-integrated rolling mills and players with leveraged capital structures. The market share
of secondary steel players is expected to reduce to 69 per cent over the next four years from 75 per cent now.
Nevertheless, CRISIL believes that secondary steel players will continue to dominate the secondary steel
industry, backed by lower logistics costs, easy access to key raw materials, and superior regional market
positions. Moreover, the credit quality of 85 per cent of CRISIL’s rated players is unlikely to be affected by these
large expansions.
Secondary steel players dominate long steel
segment
In 2010-11 (refers to financial year, April 1 to March
31), India’s total steel production was estimated at
about 62 million tonnes per annum (mtpa), equally
divided between flat products (comprising hot-rolled
[HR], cold-rolled [CR], and coated products) and long
products. While production of flat products is largely
concentrated among a few primary producers,
because of large capital requirements and economies
of scale, secondary steel producers dominate the
finished long products market with an estimated
share of around 75 per cent of the production. This dominant position of secondary steel players in the long
products segment is driven by the inherent advantage these players enjoy over primary producers in terms of
low logistics costs, easy access to key raw materials, and superior regional market positions (refer to Table 3 for
more details).
1
Secondary steel players typically comprise relatively small steel manufacturers with manufacturing capacities of less than 0.5 mtpa who
manufacture steel (semi-processed or final) through the induction or electric arc furnace route. Secondary Steel players also include players
engaged in only rolling of semi-processed steel into final finished long products.
These cost advantages neutralise the loss
in scale efficiencies vis-à-vis primary steel
producers, thereby making them price
competitive in the market. While the
quality of steel produced by secondary
steel players is relatively inferior,
customers prefer secondary steel players
to primary producers for their non-critical
requirements due to the cost benefits,
superior delivery capabilities, and ability
to service smaller lots.
These inherent advantages of the
secondary steel players have led to a
higher-than-industry average growth for
these players. The total revenues of the
274 CRISIL-rated secondary steel players
have grown at a robust compound annual
growth rate (CAGR) of 25 per cent per
annum over the past five years, while the
industry’s revenues have grown at around
20 per cent.
Primary steel producers are mostly large integrated steel producers
that make steel through the blast furnace route using iron ore,
coke/coking coal. These producers include Tata Steel Limited, SAIL, and
JSW Steel Limited. They dominate production of flat steel products and
have superior quality vis-à-vis secondary steel producers. Flat products
are supplied in hot-rolled, cold-rolled or coated conditions, and used
mainly in pipes, automobiles, and consumer durables.
Secondary steel producers are smaller manufacturers that
manufacture steel through the induction or electric arc furnace process.
These are mostly non-integrated units, present in one or a few segments
of the value chain. Long products are supplied in bars, rods angles,
channels, or rails form and are used mainly in construction and
infrastructure.
These units use thermal Coal, steel scrap and iron ore fines/ sinters as
raw materials and are present in most parts of the country, either in
key markets in West and North India or close to raw material sources in
East India. They dominate production of long steel products.
Brownfield expansions by primary producers to increase competition for secondary steel players, especially
in SE India
Table 1: Brownfield expansion plans of primary players
Primary Producer
Capacity (mtpa)
Particulars
SAIL
2.65
at Bhilai (Chhattisgarh) and Durgapur (West Bengal)
Bhilai
0.9
Long product expansion
Durgapur
1.75
Conversion of semi-finished (billets/ blooms) facility to finished
long products
RINL
3.3
Vishakhapatnam (Andhra Pradesh)
JSW Steel
0.5
Brownfield expansion at Vijaynagar (Andhra Pradesh)
Total
6.45
Primary players, which use blast furnaces to produce steel, have traditionally focused on flat products, and
account for only 7.5 mtpa of the finished long products segment. Over the next four years, however, primary
players plan to aggressively expand and nearly double their finished long product capacities through brown-field
expansions (refer to Table 1). Though these projects are brownfield expansions, some of these are running
behind schedule and remain prone to further delays because of their large size. Therefore, CRISIL believes that
production from the ongoing expansions by primary producers will increase only in a phased manner over the
four years through 2014-15. In addition to brownfield expansions, there are numerous greenfield expansions by
old and new players, which may also have capacities for long products. However, these plans are still at a
nascent stage, due to various issues such as land acquisition, allocation of captive iron ore mines, and
environmental clearances, and hence, may not materialise over the next four years.
Incremental demand for long products over the next four years is expected at around 12 mtpa, driven by healthy
expected growth at a CAGR of 8.5 per cent. This will be underpinned by continued healthy demand from the
infrastructure and construction industry, which accounts for 74 per cent of the consumption of long products.
CRISIL believes that Government of India will maintain its impetus on enhancing the quality of infrastructure in
sectors such as roads, irrigation, ports, airports, power, and telecommunications, over the medium term.
Consequently, investments in construction and infrastructure over the next five years are expected to double,
vis-à-vis the investment in the previous five years. However, incremental capacities by primary producers
account for nearly half the increased demand and will, therefore, lead to intense competition for secondary
steel players and restrict their growth. Secondary steel players are expected to achieve a CAGR of less than 6.5
per cent over the next four years (as against 10 per cent over the past three years) and market growth of 8.5 per
cent over the same period. Their market share is expected to reduce to 69 per cent by 2014-15 from 75 per cent
now. Also, the concentration of incremental capacity in SE India will create oversupply in this region. This will
put severe volume pressures on players in this region as finished long products are consumed locally, due to
their high freight intensity.
One in seven secondary steel players to be affected, primarily based in SE India
Intensifying competition, in the wake of large, ongoing capacity expansions by primary steel producers, will
affect the credit risk profiles of one in every seven secondary steel players. The affected players have their
plants in Orissa, Jharkhand, Chhattisgarh, Andhra Pradesh, and West Bengal, the area to be affected by
brownfield expansion by primary steel producers. Players in this region represent 37 per cent of CRISIL’s rated
portfolio (101 of 274 players). While most of these players will be affected, the degree of impact will vary,
depending on their level of integration and the extent of leverage in their capital structure (refer to Table 2)
Table 2: Credit impact assessment for 101 secondary steel players
Gearing
Integrated rolling players
Highly leveraged
(> 2 times)
Moderate (11%)
Lower leveraged
(< 2 times)
Low (48%)
Non-integrated rolling players
High (4%)
Moderate (17%)
Billets/Ingots players
Moderate (5%)
Low (16%)
Level of integration
Non-integrated rolling mills will be the worst hit because of their high dependence on the regional market for
offtake due to high-freight intensity of finished long products, a segment in which they will face intense
competition from primary producers. However, players who are integrated or have only billet/ingot
manufacturing facilities will be able to partly offset the risk by selling intermediate products outside their
region. This is because transportation costs are lower for intermediate products, and non-integrated re-rolling
units outside this belt partially source their raw material requirements from units in this belt. Similarly, players
with leveraged capital structures—even if their operations are well integrated—will be affected, as a decline in
revenues or profitability can considerably constrain their debt-servicing ability. About 37 per cent of CRISILrated players in SE India, which is about 15 per cent of the CRISIL-rated players in the secondary steel industry
have either non-integrated rolling mills or leveraged capital structures, and are likely to report constrained
credit risk profiles over the medium term.
However, players in SE India with strong capital structures and fully or semi-integrated players, are unlikely to
face significant pressure on their credit risk profiles. This is because they have flexibility to switch production to
intermediates, which have lower freight intensity, and can, therefore, be sold in other regions. Furthermore,
the impact on secondary steel players situated in other regions is expected to be muted as larger transportation
costs to farther off areas will reduce the pricing advantages of primary players. CRISIL, therefore, believes that
85 per cent of its rated secondary steel players will not be materially affected by capacity additions by primary
players.
Conclusion
Large expansions by primary producers in finished long products will intensify competition for secondary steel
players in SE India. As per the CRISIL study, players with non-integrated rolling operations or leveraged capital
structures, representing 15 per cent of CRISIL’s rated portfolio, will be worst affected. Nonetheless, secondary
steel players will continue to dominate the long steel products segment, with a market share of 69 per cent.
Players with strong capital structures, and fully or semi-integrated operations, or those present outside SE India
will fare better than other players.
Table 3: Inherent advantages of secondary steel players over primary producers
a) Lower transportation cost: The secondary steel value chain is flexible, enabling players to
commision intermediate product capacities near the raw material source and finished steel
capacities near the markets. For example, most steel melting units manufacturing ingots or billets
are either based in East or SE India or are near the ports. Those based in East or SE India use locally
available sponge iron as raw material, while those units near the ports use imported scrap. Finished
steel capacities are, however, based near key markets in North and West India. This is in contrast to
concentrated integrated manufacturing capacities of primary producers near raw material sources
(Orissa/Chhattisgarh/Jharkhand/Karnataka). This leads to a logistics cost advantage for the
secondary steel segment as transporation of intermediate products involves lower cost, compared
with finished products, due to the bulky nature of the latter.
b) Cheaper and readily available raw materials: Secondary steel producers use sponge iron as a key raw
material. Sponge iron requires domestically available thermal coal, whereas primary producers
require imported coking coal, which is not only expensive, but has a higher price volatility. The
import also leads to higher transportation costs as the plants of most primary producers are in the
hinterland. As against this, secondary steel producers, especially near the ports, use cheaper
imported/domestic steel scrap.
c) Deeper penetration increases ability to deliver customised requirements: The modular nature of
capacities of secondary steel players enables them to set up small capacities near the end user,
thereby enabling better market penetration. This helps players establish superior regional presence
because of faster response to customer demand for specific grades in smaller lots.
Analytical Contacts
Gurpreet S Chhatwal
Director - CRISIL Ratings
Tel: +91-11-4250 5100
Email: [email protected]
Manish Kumar Gupta
Head - CRISIL Ratings
Tel: +91-11-4250 5100
Email: [email protected]
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Last updated: 31 March, 20110.
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