Shortage of long product steel hurting EPC companies as cost goes up

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With large integrated producers focusing on high margin flat steel production, the domestic steel industry is facing a shortage of long products that is hurting the margins of contracting companies.

“There is a shortage of specialised steel pipes due to which we are forced to delay the execution of projects. We are finding it difficult to procure the material,” said M S Unnikrishnan, managing director and chief executive officer of engineering company Thermax. “It makes no sense to import these products as the duty applicable on it makes it costly for us,” he added.

There has, in fact, been a shortage of long products in the market since November last year. "Large integrated players with sizeable debts are focusing more on flat steel, which gives higher margin and has stronger demand," said a Mumbai-based trader on condition of anonymity. 

Flat steel products are used in the auto sector, while long steel products find wide application in infrastructure and construction. Large players such as Tata Steel, SAIL, Jindal Steel and JSW Steel constitute around 35-37 per cent of the long steel market in India. The balance 63-65 per cent is distributed amongst 1,200 rolling units.

Tata Steel, which recently acquired the insolvent Bhushan Steel, has a total capacity of about 12 million tonnes and aims to become a 22-23 million tonne capacity company through both organic and inorganic routes. 

Tata Steel produces about 3 million tonnes long steel while the remaining chunk of its current capacity is flat steel and value-added products. 

"We know we are short on long product production and given the thrust on development of infrastructure segment, Tata Steel is working out a strategy to increase its long product share," Chairman Natarajan Chandrasekaran had told shareholders at the AGM recently.

Sajjan Jindal-led JSW Steel too focuses on flat steel. In July, JSW Steel produced 9.86 million tonnes of flat steel and 3.06 million tonnes of long rolled products.  

“Due to a shortage of material, EPC (Engineering, Procurement and Construction) companies are bearing an increase in working capital and increase in costs, which may or may not be reimbursed by end customers,” Vimal Kejriwal, Managing Director and Chief Executive Officer, KEC International, told Business Standard.

India’s long steel market is estimated at 50.4 million tonnes as of FY18. This market has risen at 4 per cent compound annual growth rate (CAGR) over past three years, slower than aggregate steel demand (which grew at 5.6 per cent during past three years), said data from Crisil Research.

Large EPC companies, however, do not source their long products from rolling units as the products are made from scrap and hence do not have the required quality and strength needed. Due to this, dependency on integrated players for the supply of long products is higher. 

When it comes to import, India largely gets flat steel, which typically constitutes 90 per cent of aggregate steel imports. Only 10 per cent of 7.5 million tonnes of total imports in 2017-18 were long steel.

"With a pickup in affordable housing and infrastructure investment especially in roads and railways, we expect long steel demand to rise at a healthy pace of 6-6.5 per cent over next five years period," said Rahul Prithiani, Director at CRISIL Research. "After a muted growth phase in FY18, long steel demand has revived in the current financial year and is estimated to have risen by 8.2 per cent in Q1FY19," Prithiani said.

Integrated steel producers too are making an effort to contribute strongly towards long product production. JSW Steel, for instance, will see an addition in its long product capacity by 1.5 million tonnes after it recently acquired Monnet Ispat. 

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