Home / Industry / Manufacturing /  Paucity of demand hits Jalna steel mills

Jalna/Mumbai: Vivek Lunge senses his company is in trouble. Not because he knows the economy is down or that the rupee is at its lowest or India’s current account deficit is bulging—he doesn’t understand those concepts. His math is more fundamental.

“I used to get to work seven days a week earlier, but now I get work for only three-four days a week," says Lunge, a contract worker at the Saptashrungi Alloy Pvt. Ltd steel mill in Jalna, Maharashtra. He gets paid 180 a day, and having no work three days in a week means at least a 40% cut in his monthly wages.

“I don’t know how long this will continue. I am just hoping things will improve," says Lunge, who works in the mill’s scrap segregation unit.

Until mid-July, Saptashrungi and other steel mills in Jalna were quite busy, operating throughout the day, seven days a week. But now, with the twin problem of increasing costs and shrinking demand, the mills can afford to run just a single shift in a day, or just a few more, putting at stake the jobs of some 9,000 workers.

He plans to move back to his village, Harat Kheda in Ambad tehsil of Jalna district, if things don’t improve.

Jalna is the district headquarters some 60km to the east of Aurangabad in Maharashtra’s Marathwada region, with a population of about 285,000. It has 10 steel plants that convert steel scrap into billets, and 35 rolling mills convert these billets into thermo-mechanically treated (TMT) bars that are used in the construction industry. Jalna’s steel industry used to produce around 65,000 tonnes of steel a month.

But now the industry is sitting on inventory worth at least 200 crore, equivalent to a month’s stock, because of the paucity of demand. While this has hurt revenues for the steel mills, the depreciating value of the rupee has started to pinch margins. Of the 35 rolling mills, 10 have closed down and the rest are running single shifts. Production has fallen from around 2,200 tonnes a day to around 830 tonnes.

The situation has got so desperate that Saptashrungi runs its furnace, where scrap is converted into billets, only for one shift in a day. And that too only at night because Mahavitaran Ltd, the state government’s power distribution utility, “offers concessional rates to industries during night time", says Kailash Loya, a director at the mill.

If the situation doesn’t improve in a month, Loya says he might have to consider closing operations altogether.

Surendra Rerolls Pvt. Ltd shuttered its operations at the beginning of this month.

“The prices of raw material have gone up and at the same time the prices of our finished goods have come down," says Subhash Ajmera, managing director of the Jalna-based steel mill. “Around two-three months back, TMT bars were sold at 38,000 per tonne; there are now no takers for our products at even 33,000 per tonne. I am sitting on inventory of three weeks."

The main problem is that the biggest buyers of TMT bars—the real estate and infrastructure sectors—are themselves struggling.

In the first five months of this year, launches of housing projects in large cities dropped 17.02% from a year earlier to 108,000 units, shows data compiled by real estate research firm PropEquity. “The residential real estate market is following a similar trend in most of the cities. The absorption has dropped, due to which the supply has been curtailed by developers," said Gaurav Pandey, senior vice-president and head (research and consulting) at PropEquity.

Jalna’s steel mills had hoped for a good run when the prices of imported scrap began dropping—in the past year, the price fell from around $380 a tonne to $370—but “all the advantage of declining prices has been neutralized by the depreciation in rupee", says D.B. Soni, a director of Rajuri Steel Pvt. Ltd and secretary of the Jalna Steel Manufacturers Association (JSMA). About 40% of the district’s raw material requirement is fulfilled through imported scrap.

Since January, the rupee has weakened against the US dollar by 10.9%, hitting a series of record lows and declining the most among Asian currencies. The currency dropped 0.43% on Friday to 61.71 per dollar. This steep decline has made imported scrap dearer by around 300 a tonne, Soni says.

Small-scale steel units, including scrap recyclers, have been also struggling with high energy and financing costs. “Unfortunately, it (all these factors) has hit them in one shot," says Kameswara Rao, executive director (energy, utilities and mining) at consultancy PricewaterhouseCoopers.

Jalna’s steel industry dates back to 1974, when the first steel mill using scrapped railroads as raw material began operations. The industry got a big push in the mid-1990s after the licence raj was abolished and technological advancements in the field of conversion of scrap to metal made it accessible to small and medium entrepreneurs.

Till two months ago, the steel industry of Jalna used to contribute around 7 crore a month to the central exchequer by way of excise tax and 4 crore to the state government’s kitty by way of value-added tax. It also provided business of 50-55 crore to Mahavitaran, but now the power distribution utility is experiencing a 15% drop in demand, said a local official of the utility, declining to be identified.

The failing health of Jalna’s steel mills is hurting allied industries and services, too; the transporters in the area are the most affected. Around 10,000 people have indirect employment in sectors such as transportation, dhabas, and repairs and maintenance contracting.

Rahul Upadhyay, owner of Kiriti Transports, says, “My family owns a fleet of 10 trucks and all of them were engaged in transporting TMT bars all over the country for the local steel manufacturers, but now there is business enough only for six-seven trucks."

Some 50 families engaged in the transport business and owning around 300 trucks are largely dependent on the steel business in Jalna, Upadhyay said.

The toll plaza on the Aurangabad-Jalna road just outside Jalna has seen a drop in business as a result. Earlier, it used to see movement of 1,700 buses and trucks daily, but now the figure has dropped to around 1,300, mostly because of the decline in truck traffic, said a manager at the toll plaza.

Soni of JSMA hopes the government will step in with a rescue. “Both the central government and the state government can help the industry in the short run by offering some tax sops," he says, speaking for the local steel industry. “But what we really want the government to do is give a big push to infrastructure spending and also introduce policies which will increase activity in housing sector, which will lift the demand for our products."

India’s steel consumption in the year ended March was 73.34 million tonnes, up just 3.3% from the previous year, shows data from the Joint Plant Committee, a body under the steel ministry that is responsible for providing statistics on the steel industry.

With India’s gross domestic product growth forecast at 5-6% in the current fiscal year, which is close to 10-year lows, steel demand, which generally rides on the back of economic growth, is a matter of concern.

“We expect steel demand growth to be 4% in this financial year (compared with the previous year), significantly lower than the historical growth rates," said Chirag Shah, director (research) at Barclays Securities (India) Pvt. Ltd.

Meanwhile, as the fate of the steel industry in Jalna remains uncertain, workers such as Sandeep Nande, another retrenched worker with many bills to pay, may not be able to sustain in the town and would have to migrate to bigger cities in search of jobs.

Ruchira Singh, Unnikrishnan S. and Ashwin Ramarathinam in Mumbai contributed to this story.

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