Why Indian steelmakers are delaying expansion plans

Steelmakers in the port town of Visakhapatnam on the south eastern coast of India are postponing expansions as they wait for work to begin on publicly-funded infrastructure projects, company officials told S&P Global Platts during a recent visit.

Officials at long steel manufacturers, state-owned Rashtriya Ispat Nigam Limited (RINL) and privately-listed Steel Exchange India Limited (SEIL), both said they had postponed planned expansion due to receding demand from the regional construction sector as it awaited the go-ahead to start public works.

In July, India’s overall steel output surged by 9% on-year to 8.25 million metric tons, according recent data published by the Joint Plant Committee. However, domestic steel consumption rose by a much softer 3.7% over the same period to 6.9 million mt.

An ambitious Andhra Pradesh government plan to build a new state capital spread over 210 square kilometers at Amaravati had encouraged RINL and SEIL to sign memorandums of agreement with the state government in January 2016 to expand their steelmaking capacities.

However, these promised infrastructure projects are yet to bear fruit as both public and private injections of funding are still lacking, said SEIL chairman, B. Suresh Kumar.

SEIL’s plans to raise capacity at its Vizianagaram plant to 1.25 million mt/y from the current 250,000 mt/y have been postponed by a couple of years to the financial year ending March 2019, he confirmed.

Phase 1 construction budgeted at Rupees 28.96 billion ($427 million) was due to start in 2016, bringing on an additional 200,000 mt/y of rebar, 200,000 mt/y of high carbon wire and coil and 100,000 mt/y of light structurals capacity, by 2020.

The second phase of expansion set for completion by 2024 and costing another Rupees 45.3 billion includes a blast furnace, steel shop, slab caster and 500,000 mt/y hot strip mill.

Similarly, RINL’s plans to raise steelmaking capacity to 7.3 million mt/y from the current 6.3 million mt, at an estimated cost of Rupees 36 billion ($532 million), have been put on hold, company chairman P. Madhusudan told Platts during a visit to the plant.

“Consolidation of output from past expansions will continue for 18 months, hopefully in time for steel demand and prices to recover,” he said.

Furnace reline

The works’ No.2 blast furnace is currently being relined to increase its inner volume to 3,800 cubic meters from 3,200 cu m. It is scheduled to be relit after a year-long delay at the end of August. Once upgraded, the furnace will raise hot metal output by 500,000 mt.

The furnace was idled for relining in October 2016  after it was initially planned to be halted in April 2015.

“Demand is likely to remain subdued during the remainder of the year, with the launch of new government policies and regulations such as the demonetization of the currency and the new goods and services tax,” he admitted.

The new measures resulted in muted steel sales during the first half of 2017, due to a liquidity crunch and confusion over the new GST procedures, Platts notes. During the year ended March, RINL’s sales volumes remained unchanged from a year earlier at 3.7 million mt, the company chairman said.

Operations were also impacted by higher coking coal import prices for August and September due to the impact of cyclone Debbie on production at mines in Australia’s Queensland state earlier this year.

However, the introduction of the new pulverized coal injection (PCI) technology has improved efficiencies at RINL, replacing part of the coke requirement to produce hot metal.

Coke consumption has dropped on improved performance after the recent relining activity. Following the restart of BF No.2 scheduled late August, the PCI ratio will be reduced to 150 kg/mt of hot metal, from 200 kg/mt of hot metal earlier. The company aims to reduce this further to 120 kg/mt of hot metal, once BF No.3 has been relined.

The mill’s No.2 basic oxygen furnace currently under repairs will also be back in operation by late August, after which the No.3 BOF converter will be idled for similar work.

In the fiscal year ended March, RINL increased hot metal output by 9% y-o-y to 4.17 million mt, Madhusudan said. The long products maker aims to increase production further to 5.5 million mt during the year ending next March, and to 6.5 million mt in the subsequent year.

RINL’s crude steel output rose by 8% y-o-y to 2.74 million mt during April-December, according to JPC data. Output during the current financial year is expected to remain low at 4.4 million mt.

Weak iron ore demand

Meanwhile, iron ore demand from India’s steel sector has been weak to date this year, according to a recent report by Citi Research. This is significant in the context of implied domestic consumption of 150 million mt in 2015 and 170 million mt in 2017.

According to Citi’s estimates, India’s high grade ore production could rise by 10-12 million mt in the year ending March 2018. This quantity will likely find buyers if India’s steel production grows at an estimated 6%. If steel output grows below 6%, domestic competition could pressure iron ore prices.

RINL’s iron ore consumption during April to June surged by 26% year-on-year to 1.9 million mt, said an official with state-owned National Mineral Development Corporation, the sole supplier of iron ore to RINL. The company had bought 6.63 million mt of iron ore from NMDC during the fiscal year to March 30.

Considering the rise in RINL’s steel output, their iron ore requirement is likely to rise to about 7.5 million mt during the current financial year, according to the official estimates.