India’s secondary steel units reeling under weak demand, high raw material costs

A slump in steel prices, high raw material costs, and a surge in power tariffs in India's secondary steel hub Chhattisgarh are making smaller steelmakers' operations unviable and casting doubts on its expansion plans.

The state located in central India with proximity to iron ore and coal mines has the country's second-largest crude steel-making capacity, second only to Odisha which holds a cluster of primary steelmakers and will be key in helping reach India's vision of 300 million mt steel capacity by 2030.

However, ongoing weakness in the steel markets and a constrained supply of raw materials for secondary steelmakers have created significant difficulties.

"Iron ore prices are high as production is not at par with demand, at the same time steel demand has weakened and pushed prices lower and this has squeezed the margins of secondary steelmaking units," said Chhattisgarh Sponge Iron Manufacturers Association's President Anil Nachrani.

On the other hand, the distribution of domestic thermal coal through auctions is uneven and unaffordable for these units, Nachrani said, adding these challenges are making new investments risky.

Adding to costs, a power tariff hike by Chhattisgarh's state government from Rupees 6.10 per unit to Rupees 7.60 per unit from June 2024 made operations unviable for many secondary steelmaking units, with many individual units on the verge of closure, according to market participants.

Around 85% of the steel produced in Chhattisgarh is sold to other states, however, rising costs have rendered it uncompetitive, resulting in a loss of market share to other secondary steel-producing states such as Odisha, Maharashtra, and Karnataka, market participants said.

These issues have been further exacerbated by a global slump in steel markets that saw prices touching multi-year lows.

Platts assessed the IS1786 Fe500D/Fe550D 12-25 mm diameter rebar, excluding 18% GST, at Rupees 44,950/mt ex-works Raipur on Jan. 17. Rebar prices had touched at least over two-year lows on July 26, 2024, when prices touched Rupees 43,900/mt -- the lowest since Platts, part of S&P Global Commodity Insights, first started assessing ex-works Raipur rebar prices.

Indian general elections in 2024 had slowed down government spending and infrastructure projects were slow to roll out, this specifically weighed on secondary steel units as they account for the production of over 60% of the country's long steel products.

"Demand is still expected to grow in the range of 7-8%, but production has increased," Real Ispat & Power's Director Ramesh Agrawal said, adding a rebound in demand during Jan-March quarter seemed unlikely, but a safeguard duty on flat steel imports could change sentiments.

Although others were less hopeful, "State government projects have slowed down, contractors are not getting payments due to slow funding... this lowers the possibility of a long-term uptick in demand," a Chhattisgarh-based trader said.

Lower margins have turned secondary steelmaking units more cautious towards their expansion plans, several market participants said.

"As the market is down for the last 1-1.5 years, people who were planning expansions are now pausing their plans and wanting to see how steel markets rebound in the next couple of years," said Mahendra Group's Managing Director Manoj Agrawal.

If steel demand and prices don't rebound, it would be meaningless to go ahead with these expansions, as eventually, steelmaking units would have to run at reduced capacities, market participants said.

Platts assessed the spot price for pellet-based Indian domestic direct-reduced iron with 80% Fe at Rupees 24,100/mt on an ex-works Raipur, Chhattisgarh basis on Jan. 17, down Rupees 150/mt on the day.