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Metal firms invest in value-added products as demand grows

High-margin value-added products are gaining traction with domestic metal companies as the demand for such products are growing from end-user industries such as automobiles and consumer durables.

Metal firms invest in value-added products as demand grows
Metal firms invest in value-added products as demand grows

High-margin value-added products are gaining traction with domestic metal companies as the demand for such products are growing from end-user industries such as automobiles and consumer durables.
Value-added and special products typically include CRCA (cold-rolled close annealed), electrical steel, galvanised coils/sheets, colour coated coils/sheets, tinplates etc. In the non-ferrous space specifically in aluminium it goes into casting coat and coated products used in sectors like automobiles, aerospace etc.

At a time when domestic metal companies are in a wait and watch mode to see how the tariff curbs imposed by US will impact trade going forward, value-added as a segment seems to be holding promise in the next few years, and not surprising then this is where companies are focusing their investments.

Hindalco Industries managing director Satish Pai told FE that most of the company’s new investments are going into value-added products. “Our whole strategy is that instead of selling raw aluminium or copper, we will be selling valued-added goods,” he said.

Seeing a growing demand coming from the electrical sector, in transportation, packaging, building and construction especially affordable housing, Pai said the company is doubling its value-added copper and aluminium capacities over the next five years.

However, growing demand is just one part of it. Edelweiss Securities analyst Amit Dixit explains that as companies go up the value-addition way, their realisations go up but the costs do not go up in a linear fashion, which results in higher margins progressively.

“If you already have an HRC (hot-rolled coil) product line, putting up a CRC mill does not take a lot. Incremental difference will hardly be $150-$200 per tonne capacity, but you make far higher returns, so your IRR increases or the pay back period goes down significantly, if that kind of demand sustains. So, when the expectations are good, you see lot of such things coming up,” Dixit said.

For instance, Dixit says that HRC typically sells at Rs 45,000 a tonne (in the current scenario). Typical raw material spread in India is about Rs 25,000 per tonne. Adding overheads, one might expect to make HRC margin of around Rs 8,000-10,000 per tonne. “However, if you convert it to CRC it will sell around `5,000 higher, but at the same time cost of conversion from HRC to CRC is roughly $45-50 per tonne, so you make an incremental `1,500-1,600 in margin. If you go to galvanised, there are certain more elements added but your cost of conversion is similar, and it is sold `7,000 per tonne higher, then you make higher margins there,” he said.

According to Priyesh Ruparelia, assistant vice-president & co-head (corporate ratings) at ratings agency Icra, in FY18, out of the total steel consumption of 90.68 million tonnes, the demand for value-added products stood at about 23 MT, which is nearly 25% of the total demand, and further growth will depend on consumption of end-user industries.

So, if the numbers are to go by, the demand in automobile segment for instance looks robust, as analysts at Kotak Institutional Equities point out in their recent report post July 2018 volume numbers, that domestic automotive industry continues to be on a strong footing with demand being relatively broad-based across markets and rural India doing particularly well.

This would explain Tata Steel’s acquisition of Bhushan Steel, which will help the steelmaker cement its market share in the automobile segment. According to analysts, the company already enjoys a 50% market share in this segment in India and with Bhushan in its kitty, Tata Steel is expected to become a dominant player in the auto segment.

Similarly, foreseeing a rise in demand from most end-user industries and requirement from growing the infrastructure sector in India, JSW Steel has enhanced its brownfield expansion programme and increased the capex by Rs 17,600 crore in addition to the over Rs 26,800 crore that it already had in place till March 2020. This is set to create additional capacity of 6.6 million tonnes of crude steel and 3.3 million tonnes of downstream capacity for the company.

Not just private metal companies, but even the government-led Steel Authority of India (SAIL) has seen a near 24% increase in the production of value-added products in the last two years. The value-added production of SAIL at the end of FY16 stood at 5.1 million tonnes. It is at 6.3 million tonnes at the end of March 2018. Even the saleable production mix has gone up from 42% two years ago to near 45% now. Going forward, with the company’s modernisation and expansion plans the proportion of value added products is set to rise.

However, there is a flip side too. “The problem with value-added capacity is that as you go up the value chain you are getting into niche products, where demand fluctuates widely. This segment definitely gives better margins but companies are also exposed to volatility. For instance, if you produce HRC, there will be numerous industries which have usage for it, but once you produce colour coated sheet the range of application is only one or two,” Dixit said.

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First published on: 16-08-2018 at 00:40 IST
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