Secondary steel mills face a double whammy as prices for key inputs rise
Called secondary steelmakers, these companies use sponge iron or scrap iron in electric arc furnaces to make steel. This is different from large primary steel mills which operate blast furnaces to purify iron ore and then use it for steelmaking.
The shortage of coal in the domestic market pushes up the prices of sponge iron. Meanwhile, there has also been a squeeze in the availability of scrap metal, which is largely imported. This drives up the price of the commodity.
To be sure, prices for sponge iron and scrap were on average higher during the months of March and April compared to current market rates, according to data from SteelMint.
However, the prices of these raw materials have been gradually recovering since June, after a drop in May, while the prices of finished steel have tended to fall after peaking in April. As a result, the balance of input costs versus finished steel prices has been skewed, the data shows.
For example, the ratio of the average sponge iron price to the benchmark hot-rolled steel coil price in April was 0.5, which rose to around 0.63 in August. The same goes for imported scrap steel, which is the preferred mode of steelmaking by coastal secondary units.
“If we don’t get cheap coal, we can’t be viable,” the manager of a Chhattisgarh-based secondary steel unit said, speaking on condition of anonymity. “Even though
gives 8% of its production to the secondary steel industry, up to 80% of our coal needs will be met. For the rest, we can use imported coal,” the director said.
Another secondary steelmaker near Mumbai said there was pressure on margins due to volatile scrap prices. “Right now the market is very volatile. There is no (price) direction. Everyone is confused,” the head of the unit said.
Although no steelworks have had to close due to squeezed margins, the situation has jeopardized the expansion and growth of the sector, said one of the people quoted earlier.
The price of steel is closely linked to the price of coal, which accounts for half of a steelmaker’s input cost. Large primary steelmakers have relied on imported coal, the prices of which have fallen in recent months, helping them maintain profitable margins despite falling steel prices.