Hyderabad: The global economic slowdown has now impacted India’s ferroalloy industry, the world’s fifth largest, forcing it to drastically cut production.
“The offtake of ferrochrome by stainless steel companies has totally stopped and consequently, most of the (Indian) ferrochrome producers have shut production and are focusing on liquidating their inventory,” said Rahhul Aggarwal, analyst with the Mumbai-based equity research firm Pinc Research.
Demand for ferroalloy—alloy of iron with chromium, silicon and manganese, and a key material for steel makers—has fallen sharply in recent times as international steel companies have reduced output.
Indian firms have an installed capacity of 3.25 million tonnes (mt) of ferroalloy a year and account for some 7% of the global market, according to industry lobby group Indian Ferro Alloys Producers’ Association (Ifapa).
Global steel firms, such as ArcelorMittal and Corus (part of Tata Steel Ltd), have announced that they will be curtailing production by as much as 35%, and local steel makers are set to follow suit. India is the world’s fifth largest producer of crude steel with an installed capacity of 53.1mt a year.
India’s steel secretary, Pramod Rastogi, told reporters last week in Hyderabad that Steel Authority of India Ltd may cut output. The country’s largest steel maker, Tata Steel, last week said it would lower production by 30% in Europe.
“This is one of the worst crises that the Indian ferroalloys industry has suffered in the last three decades and several players have either announced or are in the process of announcing significant production cuts,” said R.K. Saraf, chairman of Ifapa and vice-chairman and joint managing director of Ferro Alloys Corp. Ltd. “We are yet to ascertain how long the crisis will continue.”
“We see a difficult two-year period ahead for the steel industry with a squeeze in demand, prices and margins. In previous recessions, the US steel industry consumption has declined by an average of 10% per annum. We believe it will be significantly worse this time around,” a team of Mumbai-based equity research firm Edelweiss Securities Pvt. Ltd said in a report published on 12 November.
Pinc’s Aggarwal said things have changed dramatically in the past two months. “Most of the ferrochrome players have totally stalled production due to lack of demand and reducing value of inventory that they are carrying.”
The ferroalloy sector suffered a similar crisis in 2000 following a global recession. It took around two years for it to recover in tandem with the revival of the global economy.
Riding on strong demand growth for steel in the revived economy, the ferroalloys sector added significant capacities. The installed capacity of the industry in India is 3.25mt a year now, up from 1.64mt in 2002-03.
But, for now, the difficult times might continue, said G.R.K. Prasad, chief financial officer of Nava Bharat Ventures Ltd, adding that the firm has decided to keep as much as 75% of its capacity idle for the next six months.
Nava Bharat is one of the largest producers of ferroalloy in India with an installed capacity of 2,00,000 tonnes a year. It posted revenues of Rs925 crore for the fiscal year to March.
“Though a drastic fall of around 50% in prices of ferroalloys is a cause of concern, we are more seriously worried over the freeze on offtake of production by the steel industry,” Prasad said. “There appears to be a high inventory hangout throughout the supply chain and the stocks piled up with the steel players should last for another six months or so.”
The Kolkata-headquartered pig iron and ferroalloys producer Visa Steel Ltd also recently announced that it is suspending operations at its ferrochrome plant at Kalinganagar in Orissa, which has a capacity of 50,000 tonnes a year of high-carbon ferrochrome, coming up as a part of a 1.5mt integrated special and stainless steel complex.
While announcing its second quarter results last month, Visa Steel managing director Vishal Agarwal said the Rs682 crore company’s “performance in the third and fourth quarters may get adversely affected owing to global financial crisis, sharp correction in commodity prices and slowdown in demand”.
The company has decided to go in for significant production cuts temporarily and will take a call on the decision based on the revival of the industry, said Visa Steel spokesperson, B. Guha.
However, Subhas Chandra Agarwalla, managing director of the Rs378 crore Maithan Alloys Ltd, said the Indian economy is better insulated from the global meltdown and the steel industry should see a recovery in the next two-three months, and the ferroalloys sector should turn around during the early part of the next fiscal year.
“Meanwhile, the Maithan management team is meeting on Friday to discuss and take a call on cutting production,” he said, adding that the company would go ahead with the plan of doubling ferroalloy capacity to 2,40,000 tonnes a year by building a 1,20,000-tonne facility near Visakhapatnam in Andhra Pradesh at a cost of Rs275 crore.
Agarwalla also expressed hope that India’s steel industry will revive on the back of huge demand coming up in rural areas, which would see a significant growth in consumption because the commodity’s prices have fallen. “This should result in the steel makers improving their offtake of ferroalloys over the next six months or so,” he said.