How future-ready is northern India's steel city Mandi Gobindgarh? A BigMint report

• Rising power bills, GST issue, imported scrap challenge Mandi units
  
  
• Almost 9 mnt additional capacity gets nod, but demand a worry
  
  
• Entry of large player, influx of steel from outside send jitters
  
  

Morning Brief: Time, in many ways, stands still at Mandi Gobindgarh, tucked away in Punjab's dusty Fatehgarh sahib district. Predominantly industrial. Moderately sleepy. Neatly stacked billets and rebars still line the induction furnace units. Scraps lie in untidy heaps in yards.

But, the roads have become wider. A few bridges and flyovers have made way for the small, narrow by-lanes. Digital India has made inroads - online platforms and social media are used in transactions. And the steel trading neighbourhood has become part of the tourism circuit!

Mandi's history dates back to 1646! According to legend, Guru Hargobind's warriors had pitched tent for 40 days along the banks of Lake Barhi Dhab. A skirmish ensued with a Mughal contingent. The Guru's warriors failed to continue due to a lack of steel for repairing their weapons and pleaded for replenishment. The Guru, seeing his hapless followers, prophesied the area would one day become a major steel-producing centre.

Steely resolve: Mandi's contribution

And true to the Guru's prophesy, what began as an earnest effort from Mandi's residents in the early 20th century, slowly evolved into a major steel hub. Today, it, along with Ludhiana, stands as the principal steel-producing city in Punjab, earning the nickname of 'Steel City' or Loha Mandi. Mandi Gobindgarh is the market mover in the domestic ferrous scrap space today. A slew of market intelligence providers are busy throughout the day, providing real-time prices through online platforms. And, these form the backbone of all domestic ferrous scrap transactions across India.

In India's total steel production capacity of around 167 million tonnes (mnt) about 11 mnt is contributed by northern India. Within the north's entire capacity, Punjab produces a significant over-6 mnt.

In financial year 2023-24 (FY'24), Ludhiana had received approval for a total of 3 mnt of additional crude steel capacity and Punjab, 6 mnt. The expected time of completion of such capacities is 5-6 years. However, if not all, at least 50% is expected to get commissioned by 2030.

Raw material (scrap) sourcing

Domestic scrap: The northern region is majorly dependent on scrap for its steel-making. With the growing emphasis on controlling carbon emissions, demand for good quality scrap has increased, leading to its resultant scarcity.

However, due to scrap's easy accessibility in local and nearby regions, steel producers in Punjab prefer it over sponge iron, using 5-20% in their feed, depending on plant, and availability. Daily transactions involve 15,000-20,000 tonnes.

Local scrap is sourced from Delhi-NCR, Haryana, Uttar Pradesh, Bihar, Rajasthan, and Himachal Pradesh.

Imported scrap: A few large-scale units also procure scrap from overseas, depending on price viability. Material from the Middle East ,US and Europe are preferred because of higher yield. Imported scrap volumes have significantly increased in FY'24 to 1.65 mnt, from 1.08 mnt in FY-23.

Sponge iron: India is one of the leading global producers of sponge iron, with an annual operational capacity of 58 mnt. Sponge iron contributes approximately 30% to the total steel production in the country. The central, eastern, and southern regions, responsible for around 90% of the production, are also key exporters.

The north is also increasingly relying on sponge iron as an alternative to scrap, sourcing especially from eastern India, due to the latter's superior materialisation content -- ideal for producing high-carbon steel. But, still, scrap remains the primary raw material for mills in north India.

Ferro alloys: Silico manganese is sourced from Jharkhand, Odisha and Chhattisgarh, with the bulk being procured from Durgapur, because freight to Mandi from West Bengal is lesser (INR 3,500/t) compared to other states. Major mills depend on local traders, rather than buying directly from ferro alloy manufacturers.

Energy scenario: Coal and power are the major sources of energy for the Mandi cluster. Coal is mainly imported from the US (7200 GCV) and some amount from Assam in north-eastern India. Grid-based electricity from Punjab State Power Corporation Limited is used by the re-rolling units.

Current market scenario

At present, Mandi Gobindgarh houses 500-550 small and medium-sized induction furnaces while some re-rolling units have also been installed. Currently, 120-125 induction furnaces of small/medium/large capacity are in operation at Fatehgarh. Apart from this, 300-350 small and medium scale re-rolling units are also functional while 25-30 furnaces in Ludhiana produce special steels.

Steel manufacturing in Punjab is done only through the induction or electric arc furnace route.

The major products manufactured in the cluster include rounds and squares ingots/billets, TMT, wire rods, structures, and hot rolled strips (patra) etc.

Why is Mandi losing its edge?

However, Mandi Gobindgarh, once looked upon as Asia's premier and thriving steel town, is gradually losing its competitive edge today, resulting in the closure of numerous micro, small, and medium units of late.

A plethora of reasons are conjoining to take the sheen off Mandi.

Rising power tariffs: Today, Mandi mills are unable to realise even their minimum conversion costs because of rising power tariffs. Recently, the Punjab State Power Corporation raised tariffs by INR 6.5-7 per kVAh for five years with a 3% yearly increase, effective 1 April. This raises power bills by INR 1/unit and the cost of production by INR 500-600/t, taking away the competitive edge.

Cash flow challenge: This is a key reason challenging the small and medium-scale units out of the market. The previous 7-10-day payment settlement period has prolonged into a month. This lag can be traced back to finished sales, which have been subdued for months now. Since the payment cycle for finished goods has become sluggish, in a domino effect, the semis and raw material (scrap) suppliers are also facing a delayed settlement scenario, leading to an overall liquidity crunch in the market.

GST issue: Mandi is primarily a highly unorganised market where most transactions are out of the GST ambit as these are not done on official bills. The government, on its part, keen to increase revenue from taxes, has been conducting frequent raids to weed out illegal transactions. But this cat and mouse game has led to lessening of transactions over time.

If the government removes GST or proposes to charge a nominal percentage then the concept of bogus billing can be automatically weeded out. This approach will not only boost the local industry but also encourage neighbouring states to maintain a steady flow. Additionally, it will improve availability of raw materials, ensuring a smoother supply chain and fostering growth across the region.

Influx of semis, finished steel from outside: Mandi re-rolling units are committed to sourcing from local ingot and billet manufacturers, while it is the responsibility of the semis producers to offer competitive discounts and extend credit facilities to support them. But the market is seeing an influx of semis and finished steels from beyond the Mandi region

The main challenge, however, is sales, as large mills have increased production capacity and are now catering to small and medium-scale mills' customers. This has led to a continuous decline in the number of smaller mills in Mandi, with a noticeable reduction seen year after year.

Entry of large player sends jitters: Tata Steel and the Punjab government recently tied up to set up a 0.75 mntpa long products facility using an electric arc furnace powered by scrap in Kadiana Khurd in Ludhiana's Hitech Valley.

The entry of a big player has unnerved the Mandi players who feel scrap availability will come under pressure and prices of the same may head north too. Domestic scrap prices dropped 4% y-o-y in FY'23 and imported by 32%, giving players a breather last fiscal.

Way forward

Standalone plants' future uncertain: It is apprehended that the standalone plants, such as ingot producers without a rolling facility on site, will not be able to sustain their margins in the long run and eventually opt out.

Since the conversion margin from raw material to semi-finished has been getting squeezed due to fluctuation in scrap prices, only those standalone induction furnaces which are planning to include a hot charging mill within their complex will be in the race. Shifting to continuous casting machines (CMMs) may help reduce their operating expenses.

Future scrap requirement: The current annual scrap requirement is around 5.17 mnt but, following expansions, this will likely rise to 7.5 mnt and many feel the dependence on imported scrap will increase as domestic scrap availability will come under pressure.

Question mark over demand: Major large and medium-scale mills have increased their production capacity, but players in Mandi are also concerned about future demand. "If demand does not keep pace with expansion, it will be a challenge," said a source. Indeed, there is a short-to-medium-term challenge regarding demand, but this may smoothen out in the long run.

Adequate credit facilities: The government should consider providing adequate credit facilities, subsidies, and loans to small and medium-scale mills to enhance their efficiency. Offering rebates on electricity could further support their growth. Additionally, large mills could play a crucial role by sharing a portion of their substantial orders with smaller mills, which would help boost the overall industry and ensure a more balanced growth for small and medium enterprises.

Cap on price fluctuations: The market currently sees hourly fluctuations. If prices are set in the morning, both buyers and sellers will be bound to that rate for the entire day. This will ensure a steady transaction flow and cap disruptions in trading patterns through the day.

Note: BigMint currently provides daily price assessments for HMS (80:20), End-cutting, and CR-busheling scrap in the Mandi Gobindgarh and Ludhiana regions.

We extend our gratitude to the key players in the North Indian steel industry for their valuable contributions to this article.

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