Secondary steelmakers to be hit as primary players hike capacity

One in seven secondary steel producers will be affected as
large primary steelmakers such as SAIL and RINL expand their capacity, reveals
a study done by Crisil. Secondary producers use scrap as raw material and
induction/electric arc furnaces to produce steel.

“The impact will be largely on players operating in
South-East India, where most of the incremental capacities are coming up,” said
Crisil in a statement. This is after studying the credit-risk profile of 274
secondary steelmakers, which dominate the 31-million-tonne long-steel product
segment in India.

Secondary players have small capacities, but collectively
command 75 per cent of the long product market, given their low logistics
costs, access to key raw materials and superior regional market position.

Primary players, which account for a fourth of the long
product market, are doubling their product capacities as they expand their
operations.

“With primary producers accounting for nearly half of the
expected incremental demand of around 12 million tonnes for long products over
the next four years, the secondary players' market share will decline to less
than 70 per cent,” Mr Gurpreet Chhatwal, Director, Crisil Ratings.

The capacity expansions may affect the credit quality of
around 15 per cent of Crisil-rated players mainly based in the south-eastern
region and having non-integrated rolling mills or weak capital structures.

Secondary producers are dependent on local markets for
off-take. “Players with leveraged capital structure, even if their operations
are well integrated, will also be affected as a decline in revenue or
profitability can constrain their debt-servicing ability,” Mr Manish Gupta,
Head, Crisil Ratings, said