If you look around, you will notice that steel is used in a lot of things. From paper clips to the rods used to make your house, steel is everywhere. It is one of the most common alloys out there. Buildings, automobiles, utensils are just a few examples out of the numerous things in which steel is used. But not all steel is same. It comes in various varieties such as carbon steel, tool steel, stainless steel or alloy steel.
Steel Making Process
Before we take a deeper dive into workings of the steel industry, let us first understand the process of steel making. Now if you are wondering why you need to understand the steel making process to invest in the steel industry, the answer is that you must have a full knowledge of the business you are investing in. Never invest before understanding the business. Think of it as if you were to start your own steel business you would first need to have the knowledge of workings of the steel industry. So moving onto the topic, steel is an alloy made by combining iron with other element(s) which is usually carbon. So iron ore and coke are the basic raw materials used in making steel. Limestone is also a raw material required for making steel.
The process of steel making begins by a process known as Sintering Process in which the iron ore that is extracted from the earth is heated at high temperatures and turned in to melted iron. Similar process known as Coking Process is carried out for coke till it turns to lumpy aggregates. In the next step, the sintered iron and coke is transferred to a blast furnace and hot air at temperatures of 1200 degree Celsius is blown into the blast furnace from bottom to heat the coke and thus melt the iron. This melted iron is known as Pig Iron.
The next process involves making steel from this iron. For this two processes can be used. The first one is known as Basic Oxygen Furnace process (BOF) and the second one is known as Electric Arc Furnace process (EAF). In BOF, iron is combined with varying amounts of steel scrap (less than 30%), after that very pure oxygen is blown into the vessel causing a rise in temperature to 1700 degree Celsius. The scrap melts, impurities are oxidized and carbon content is reduced by 90%, resulting in liquid steel.
EAF or mini-mill does not involve iron making. It reuses existing steel (scrap), avoiding the need for raw material and their processing. The electric arc operates with an electric charge between two electrodes providing heat for the process. Due to no major requirement of raw material, EAF is less costlier than BOF but BOF produces higher quality steel than EAF.
The final step in the steel making process is Continuous Casting Process. In this process the steel is forged into various steel products such as coated steel, stainless steel, wire rods, et cetera.
Now that you have an idea of how the steel industry functions it won’t be hard for you to understand how the profitability of steel makers is affected. The higher the costs of raw materials the lower the margin. Although India has sufficient iron ore, it depends on imports for needs of coke and other raw materials & taxes on imports makes it expensive for steelmakers to import these raw materials thus driving up costs and affecting profitability.
Situation in India
As of December 2019, India produced 111.24 million tonnes of crude steel during the year making it the 2nd largest producer of steel in world right after China. According to National Steel Policy, 2017 India aims to take this number to 300 million tonnes per annum by 2030-31. According to a report of 2019, India’s per capita steel consumption was as low as 70.9kg compared to the global average of 224.5kg whereas the per capita average of the largest steel producer, China, is a whopping 590kg. The aim of the National Steel Policy, 2017 is to take this number to 160 kg by 2030-31.
During the Covid-19 pandemic and the nationwide lockdown the demand for steel took a major hit just like everything else and thus the production was also drastically reduced. But after the lockdown lifted steel production picked up very fast along with domestic demand and even reached pre-covid levels by the end of 2020. Along with that, the prices rose to new highs. The reason for rising prices can be associated with the rising price of raw materials (iron ore), shortage in global steel supply and lower capacity utilization due to covid.
State run SAIL (Steel Authority of India Ltd.) is currently the largest steel producer in India. Other major players in the Indian steel industry are Tata Steel, JSW Steel Ltd, Jindal Steel Ltd, Essar Steel. During the past few months steel stocks have been performing well and companies are in good condition.
While investing in any steel company you must look out for various factors such as future demand, cost of raw materials, steel prices, production process, market sentiment, industry figures, etc. If you have read till here you must have a good idea of how steel industry functions and now you can take your own investment decision.
That’s all for this industry study. Until next time…
This blog has been written after collecting facts from various sources. The author is not responsible for discrepencies in any information presented above.
The views expressed here are author’s personal opinion and are not investment advise for any securities.