Steelmakers moving up value chain for better margins

 

India’s top three steelmakers — SAIL, JSW Steel and Tata Steel — have decided to move up the value chain. To achieve the goal, the three have exited, or are on the verge of exiting, the production of semi-finished steel products.

The steelmakers don’t see a reason why they should not graduate to making higher grades of steel. After all, value-added steel gives them better margins, which in turn, boosts profitability in the same production capacities.

Earlier, some portion of their semi-finished steel was sold in the market, but now they are looking at dowsntream, as the margins are high. So, they are not selling it in the market but using all of the semi steel to make finished steel.

Ratan Tata, chairman of the Tata Group, during Tata Steel’s 104th annual general meeting (AGM) in Mumbai last week, said 80 per cent of the company’s total steel production now caters to the market which requires higher grades of steel. He said Tata Steel produces very little of semi steel. Tata Steel CFO Koushik Chatterjee told Business Standard, “We don’t produce semi steel at all now.” He said the strategy for the company was to produce more in the downstream and hence the decision to exit semi-steel production.

“We don’t sell billets and slabs anymore and in the flat products we sell hot strip and cold rolled steel, galvanised steel, tubes, tinplates, etc. In long products, we sell rebars, wire rods and wires, etc. Therefore, I would say 100 per cent is downstream now. There are no semis,” Chatterjee said.

An analyst with a domestic research firm said, “Value-added steel gives a higher margin to steelmakers. They are bound to be attracted to produce higher grades, as it gives them a better cushion against the prices of raw material.”

JSW Steel, an O P Jindal Group company with an 11-million-tonne capacity (without Ispat Industries), is also focusing more on value-added steel. The company sold just six per cent of semis in 2010-11 as against 22 per cent of the total sales in 2009-10. Even though the total sales volumes for the company grew by seven per cent in 2010-11, at 6.1 million tonne, the production and sales of semi-finished steel were constantly reduced.

JSW Steel’s focus on value addition is visible from the fact that its vice-chairman and managing director, Sajjan Jindal, during the company’s 17th AGM on July 25 said, “Fifty per cent of our total steel production will be in the value-added segment like cold rolled and galvanised steel.” The company sold seven per cent more value-added steel in 2010-11 compared to the year before.

Public sector Steel Authority of India Ltd (SAIL) is also eliminating the production of semi-steel by FY12. The company looks at expanding its production capacity to 24 million tonne from the 13.2 million tonne. For this, it will give thrust on value-added and higher grades of steel.

 

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