Secondary steel sector: policy stability, quality access to energy, and risk support needed

Energy efficiency is critical for secondary steel manufacturers where margins are increasingly getting squeezed by surging production costs and unavailability of affordable raw materials. These MSMEs need the right combination of energy policies at the state and central level, and they need reliable access to energy, if they are to survive, grow, and keep energy costs under control.

The Micro, Small and Medium Enterprises (MSME) contribute nearly 8% of the country’s GDP, 45% of the manufacturing output and 40% of the exports.  In the steel sector, secondary producers include: mini steel plants (mini blast furnaces, EAF, EIF and EOF), and standalone processors in steel re-rolling sector that do not have captive steel making facilities (typically comprising of re-rolling and finishing mills).

The capacity of producing crude /raw steel in India is much higher than the capacity to roll and refine steel into finished steel products. Whereas Integrated Steel Plants are increasingly leveraging economies of scale by adopting an end-to-end process for steel making, continuous casting, and finishing; there is a sizeable range of finished products that is not handled by integrated steel plants. Hence, secondary steel sector plays an important role and contributes significantly to total finished steel products. As steel-making capacity and outputs continue to increase, the share of secondary producers in this industry is increasing.  

FIG 1:

Source: Media reports, cKinetics analysis

Stable Policies for Energy Access at a State Level

However, the vulnerability of the steel sector to resource costs and state policies can be seen at a high level through the  performance of major steel clusters – Mandi Gobindnagar, Raipur, Durgapur and those in Orissa. News analysis suggests that power and electricity tarrifs and policy variability  within each state are affecting the extent to which secondary steel units find it viable to operate. 

FIG 2:

Source: Media reports, cKinetics analysis

In the absence of stable access to electricity to power induction furnaces, cheap pulverised coal is the fuel of choice for re-heating furnances in re-rolling mill, followed by diesel, furnance oil, and gas. Hence, quality of the  grid access provided by the state, and state action on enegy policies,  has a huge impact on the overall resource foot-print for the sector.

Government incentives and risk mitigation support

MSME credit agencies in the steel sector report that overall production efficiency is low on account of inadequate technological advancement, and due to this, Indian steel industry faces issues of quality, efficiency and process standards. 

The financial picture for the secondary steel sector looks equally bleak, and appears limiting – this sector cannot be expected to move along an energy and resource efficiency path on its own. By way of illustration,  information available for the TMT bars re-rolling sector suggests that there is limited financial capacity for MSMEs to roll out productivity enhancements.

According to reports,  MSMEs are facing narrow margins, increasing cost of fuels and raw materials, tight working capital requirements to absorb operational vulnerabilities (e.g. delays in materials transport, payments, un-planned and costly power outage), increasing levels of debt and declining interest coverage.

FIG 3:

Source: Data from ONICRA Report, ‘India: Poised To Be The Next Steel Giant’, 2013.

In a similar fashion, cKinetics’ anlaysis of publically available energy audit reports of re-rolling mills in Bihar show a PAT margin at only 1% of total expenses, while fuel and power cost constitute 32% of total expenses.  A large power bill confirms that a focus  on energy efficiency and productivitity could have a sizeable impact on an individual MSME in the secondary steel sector. However, the 1-3% margin difference between profitability success or failure makes efficiency changes very difficult to implement in practice without government / institutional support or some form of risk garantees.

Sustainability Outlook reports on the savings potential for the secondary steel sector here.

 Image Credits: Jay Hariani