- Increasing power tariffs increasing production costs
- Power cuts forcing production cuts
- Steel mills with captive power plants are diverting power to grid
- Sponge iron mills impacted by coal, power costs
Morning Brief: India’s induction and electric arc furnace mills are in a Catch-22 situation. The cost of production is being propelled upwards by power and coal costs while demand has receded due to the sharp rise in finished prices.
The high cost of power and outages are impacting production while escalated thermal coal prices are putting both the power sector and power-intensive IF and EAF mills, and especially sponge iron players, in a quandary.
As a result, such mills across the country have no option but to curtail production. Many have already started doing so to combat present challenges.
Power sector starved of coal
With India having entered peak summer, power utilities are bending backwards to source coal. Fuel stocks at power plants have touched a nine-year pre-summer low while for Coal India, the key supplier of domestic thermal coal for power generation, it is an uphill task to keep pace with demand.
The Ministry of Power, sensing the urgent need to keep peak summer power supply uninterrupted, has proposed utilities import up to 10% of their coal for blending to ensure adequate stocks. But, at what cost?
SEBs implement power cuts, raise tariffs
State Electricity Boards (SEBs) are gasping for coal. So much so that, as per information available with SteelMint, Andhra Pradesh is the first state to have implemented 50% mandatory power cuts to the industrial sector. In other states, Ludhiana in Punjab is bracing for power outages from 10 May, and in Chennai, Tamil Nadu, steelmakers are awaiting 15-20% power cuts in May-June. Raipur, a secondary steel hub in Chhattisgarh, is already experiencing unscheduled power cuts while Goa is seeing a 120 MV shortfall.
Power utilities, on their part, hedged in by spiralling coal costs and dwindling stocks, are resorting to tariff hikes across locations like Ghaziabad, Muzaffarnagar, Ramgarh, Raipur and Hyderabad, which will be passed on to the end-consumer.
In Maharashtra, for instance, although there is no change in power tariffs, mills in some regions are facing power cuts, which are impacting production. Due to power cuts, discounts like load factor incentives etc are being denied, resulting in an increase in the cost of power. The incentives amount to INR 2.50/unit while the actual cost of power is INR 7/unit. However, at present, this has increased to INR 9.50/unit, informed Yogesh Mandhani, President, Steel Manufacturers Association of India.
“The power factor is not only hampering production but increasing the cost of production too,” he rued.
An Andhra Pradesh-based steel mill with interests in sponge iron, billets and TMT, told SteelMint that the state introduced 50% mandatory power cuts for the industrial sector a fortnight back. There is no clarity on how long these will continue.
“The cost of power is up by INR 1.25/unit on average from the earlier INR 5.85/unit, plus INR 6/unit EB duty. Actual power tariffs are up to INR 7/unit from 1 April.
Thermal coal hits utilities, sponge mills
On the other hand, thermal coal prices, the main feed for utilities and sponge mills, are touching sky high. Thermal coal prices imported from Indonesia by utilities are up 43% m-o-m in March, 2022 to almost $109/t FOB while April prices till date are almost up 80% y-o-y.
RB2 imports from South Africa, favoured by sponge iron mills, are nudging INR 20,000-21,000/t portside from a low of INR 9,000-11,000/t in December 2021.
Mills in Maharashtra are unable to get the volume required and if available, imported is at a steep INR 15,000-18,000/t while the indigenous variety is not less than INR 12,000/t.
“There is an almost 50% increase in the cost of production because of power and coal costs,” revealed Mandhani.
For a south-based mill, coal prices have immediately increased sponge production costs. “Earlier RB2 used to be INR 12,000-13,000/t, then touched INR 21,000/t and further to INR 23,000/t. But the sharp fluctuations in the market are more challenging to deal with. If the market supports in terms of finished prices only then can we absorb the escalated prices of coal,” said the source from southern India.
Mills have no choice but to cut production
Induction and electric arc furnaces units, highly power-dependent, are naturally feeling the heat, unable to run at optimal capacity.
Chander Prakash Agarwal, Director of Jharsuguda, Odisha-based SMC Power Generation Limited, told SteelMint that power and coal costs have forced the company to curtail its 110-MW captive power plant. The cost of power from coal sourced locally has gone up from INR 3.50/unit to INR 11.50/unit. SMC has therefore stopped generation from coal and is continuing with the waste heat recovery source for its sponge mill. It has also stopped importing RB2 from South Africa. As a result, sponge production has dropped from 5 lakh tonnes to 3 lakh tonnes since the last one month while output at its IF and rolling mill has been curtailed by 40% at least.
Maharashtra is already seeing a 30% drop in production across IF and sponge iron mills. And this percentage may rise because the high price of steel is impacting downstream users. “Demand is impacted. By default, production will be reduced further,” warned a source.
“The entire ecosystem has been disrupted by power and coal costs. These should be such that they are viable for the buyer and manufacturer both. Right now, prices of finished products are being pushed up by inadequate supply of power and coal, and high tariffs and coal prices. End-users are finding such prices unviable,” stressed Mandhani.
By default, production at the Andhra-based company’s IF and SMS mill is down 50%.
India’s total installed crude steel capacity is 167 mnt while actual production is pegged at 118 mnt as per SteelMint’s data. In this, the share of IF-EAF production is 65.24 mnt with the BF-BOF segment contributing 52.64 mnt.
Sell to grid rather than make steel
Many mid-sized integrated mills are turning off production to sell their captive power to the grid, as margins here are higher than in selling steel, SteelMint heard. Corroborating this news, a source said a particular state has capped the price at which mills can sell captive power to the grid at INR 12/unit while the cost incurred for making steel/sponge iron is INR 6-7/unit.
“With the cost of production up almost 50%, and demand reduced, it makes more sense to not produce steel but sell that power instead in the open market and reap some benefit,” said a source.
Outlook
So far, Andhra Pradesh is the only state having implemented mandatory power cuts. If other SEBs follow, or increase tariffs, then secondary mills will have to further curtail production. This will put supply under pressure and further increase the cost of steel and push downstream users to the sidelines.
The government should intervene to make both power and coal available in requisite quantities and also rationalize domestic prices of both, especially for the industrial sector, added another source
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