The Indian Iron and Steel industry has witnessed a sea of changes over the years with respect to technology and innovation, business strategy and other related issues. However, some significant issues have cropped up during the recent times related to the non-availability of key raw materials (iron ore, coking coal) and hence, there is a sharp rise in price of finished steel and a shortage in supply, says a Frost & Sullivan study.
Moreover, due to high input costs and non-availability of raw materials (a blanket ban on iron ore mining in Karnataka by the Supreme Court for fear of large scale environmental degradation via illegal mining, is one of the key contributors), certain steel producers are under utilising their capacities and foresee having to shut down their operations – if the scenario worsens.
The iron ore eAuction in Karnataka is expected to bring down the profitability of steel-sponge iron companies in Karnataka and nearby locations. Iron ore procurement through eauction is resulting in under utilisation of their installed capacities as eauction does not guarantees iron ore quality and quantity procured. This scenario is expected to have a negative impact on the total finished steel output in the medium term.
In a Nutshell
Profitability margins of the steel-sponge iron companies (operating out of Karnataka and nearby clusters) is expected to spiral downwards due to increased procurement costs and resultant lower capacity utilisation due to non-availability of iron ore, which may not cover the overhead costs fully.
To operate their plants at desired capacities steel companies in the South (especially in Karnataka) are looking at other sources (from Jharkhand and Orissa) to procure iron ore. Hence, this might cause the demand supply gap to widen in other states too - resulting in shift of supply chain dynamics and price fluctuations and non availability of finished steel products.
The actual effect of the eAuction system would reflect in lower profitability during Q3 and Q4 of FY12. Frost & Sullivan envisages that this would have a significant negative impact on the industry volume. However, specific companies would face challenges in their diversification plans.
Over the long-term, we expect that the Government would implement efficient policy measures by which India can achieve the planned total steel output targets – as per National Steel Policy (which is to be tabled for revision soon).
We foresee that large steel companies would focus more on strategising their iron ore sourcing practices via backward integration (acquiring iron ore mines in India or abroad). Medium and small scale companies are expected to form an alliance to acquire mining licenses or acquire active mines to source iron ore (from Karnataka).