10.1 – Overview

As I want to start writing this chapter on steel, I am thinking of a good way to start. I look out the window; the balcony railing is made of steel. The chair I am sitting on has steel rods. Cars, utensils, boats, hairpins, space crafts, screws, buildings, toys, and guns are made of steel. It has applications at home, on the streets, in defense, in space exploration, and whatnot. Steel is perhaps the most commonly used material in the modern world.

It is a massive industry and a major employment generator. In 2022, China was the world’s largest steel producer at 54% global share. India stood a distant second at 6.6% of the world’s production. Due to China’s global steel dominance, steel players in all other countries have become price takers.

A price-taker business or sector has little control over its pricing. External factors heavily influence the product prices of such businesses. Most commodity businesses are price-takers.

A price-maker business can independently decide its product prices and even influence its competitors’ prices. Externalities have little influence. Apple and Nike are price-makers in their respective industries.

Remember, in late 2021, China had ordered a temporary shutdown of some steel manufacturers due to energy shortages and emission concerns? This caused global steel prices to rally. Also, the scaled-down domestic steel production caused China’s iron ore producers to export more iron ore, thereby depressing global iron ore prices. Cheaper iron ore and expensive steel produced solid profits for Indian steelmakers that year.

The world’s per capita steel consumption is about 233 kg, while India’s per capita steel consumption is roughly 77 kg. India’s current steel production capacity is 125 mtpa. The plan is to take the capacity up to 300 mtpa by 2030. While growing exports is always good, I believe most of this steel will be for domestic consumption. 

Note that China produces over 1000 mtpa but exports only 70-80 mtpa. It uses over 90% of its steel domestically. Sure, a lot of domestic usage must be for manufacturing goods that will be exported. But the crux of the matter is that steel production and consumption seem inherent to India’s growth plans.

Steel is commoditized globally. Commoditization happens when companies offering the same product cannot differentiate in quality and features. Metals like steel, aluminium, gold, and silver are commodities. Crude oil is also a commodity. In such cases, companies compete based on sourcing, distribution, marketing, and financial muscle.

I like reiterating that a manufacturing sector is best analyzed by understanding its value chain. I introduced the concept of value chain in Sector Analysis, the first chapter of this module. I will break down the steel value chain into three sections – sourcing, production, and distribution.

10.2 – Where are the raw materials for steel sourced from?

Iron ore and coking coal are the primary inputs for making steel. About 1.7 tonne of iron ore and 0.8 tonne coal go into making one tonne of steel. However, coking coal is a larger cost center. Iron ore would cost around $100/tonne. Coking coal comes for about $250-300 per tonne. Therefore, coal prices have a larger impact than iron ore prices on steel prices. 

Sourcing coking coal: While steelmaking requires coking coal, India specializes in thermal coal. India does not have adequate reserves of coking coal. Indian steelmakers rely on imports for 90% of their coking coal requirements. Captive coal mines of Indian steelmakers help control only some costs. They have to buy the rest from Australia and a bit from Russia and Indonesia. Importing coking coal makes the process expensive. 

Steelmakers use Pulverized Coal Injection to control coal costs. PCI is a process of injecting large volumes of fine coal as a partial replacement for coking coal.

Further, to help decrease reliance on imported coal, the Indian government, in June 2023, decided to reserve some coal mines with attached washery operations exclusively for steel companies. The coking coal mined in India needs to be cleansed of impurities to make it more combustible. Coal washery uses water and industrial separators to filter shale, sand, and stones out of the raw coking coal to make it usable for steelmaking. Non-coking coals may also be washed for applications in other industries. 

Sourcing iron ore: India is abundant in iron ore. Iron ore can be of two types – hematite and magnetite. India primarily uses Hematite. Hematite iron reserves are mainly found in the eastern states of Odisha, Jharkhand, Chhattisgarh, Assam, and Bihar. Magnetite is a richer source of iron ore but is mostly found in the ecologically sensitive areas of the Western Ghats. Therefore, recoverable reserves of Magnetite are roughly a third of recoverable Hematite reserves. The southern states of Goa, Karnataka, Andhra Pradesh, Kerala, and Tamil Nadu have the most Magnetite reserves in India.

Like I said earlier, cost control is critical for commodity companies. Larger steel companies have integrated backwards to control costs. Tata Steel meets 100% of its iron requirements and about 20% of its coal requirements in India from its captive mines. JSW meets ~40% of iron requirements from captive mines.

Did you know that JSW Steel has a ~24 km conveyor belt between its captive mines and the Vijayanagar plant? It is a great cost-cutting measure, but the length of the belt is astonishing.

10.3 – How is steel produced?

Setting up the raw materials

Iron ore can be in the form of sinter, pellets, and lumps – depending on the iron ore grade. A high-grade ore can be used as lumps; lower grades might go as pellets or sinter. Pellets are small oval-shaped lumps that are hardened using fuel. Sinter iron is grainy. If the extracted iron ore has high impurities, it is ground into gravel, cleansed using magnets, and processed into sinter.

Parallely, coking coal is heated in an oven to produce coke and clean it of impurities. Coke is the source of carbon required in the steel alloy. Coke comes in the form of briquettes. Gas produced in this heating process is used as fuel. The by-products, tar, and sulfur, are extracted and refined.

Making iron

The iron ore and coking coal are now fed into a blast furnace from the top. Limestone and some other additives are also added.

The mixture is heated inside the furnace at temperatures as high as 2200 degrees Celsius.

This process creates pig iron or molten iron in the bottom half of the furnace. The limestone combines with other impurities to form slag. The slag is used as an input in road construction and cement making. We have seen in the cement chapter of this module how slag is blended with cement.

The molten iron is released from below the furnace, and the slag is skimmed off the top.

This molten iron is not pure. It is treated again to stabilize its iron content. At this stage, carbon, sulfur, phosphorus, manganese, and silicon content must be managed, and other elements must be added depending on the type of steel required. While the molten iron here can be used for casting iron goods, most of it goes into making steel.

Making steel

So far, we have just made iron out of iron ore. This is where the actual steelmaking begins. There are two common ways of making steel.

  1. Basic Oxygen Furnace
    The molten iron is fed into a basic oxygen furnace (BOF). Some scrap steel (<30%) may also be added. High-purity oxygen is blown into the furnace, causing the temperature to soar above 1700 degrees Celsius.
    The outcome is liquid steel, carbon monoxide, and slag. Carbon content in the steel is down from 4% to 0.05%. The heat generated from oxidation creates carbon monoxide, which is cleaned and reused as fuel. Oxidized impurities combine with limestone to form slag.
  2. Electric Arc Furnace
    This process does not involve iron-making. EAF primarily uses scrap steel to convert into the final product. Steelmakers using EAFs are also called mini-mills. Mini-mills are often found closer to cities.
    Let’s say an automobile company in Tamil Nadu bought sheets of steel. It will cut the sheets in the required size. The remaining sheet is scrap. Instead of sending it all the way back to Odisha or Jharkhand, where most steel plants are, it can send the scrap steel to a mini-mill in its vicinity. This steel plant relies mainly on scrap steel as its input. It uses virgin steel semis only to balance the final composition. That way, dependency on iron mines is reduced, and proximity to clients is ensured. Since it recycles steel for reuse, the process is environmentally friendly, too.
    Now, back to the EAF process. The furnace is filled with recycled steel scrap. A powerful electric current passed through the furnace creates heat to melt the mixture. Limestone and fluorspar are added to the molten steel. Carbon and high-purity oxygen are blown into it. As a result, molten steel is formed, and the impurities combine to form slag.

Steel Casting

Through either of the two methods, molten steel is now ready. It is sampled and analyzed. Other alloys may be added to ensure the desired composition. Once it reaches the correct temperature and composition, it is extracted from the bottom of the furnace. 

From there, the molten steel is channeled into a caster. It comes out in the form of a slab, bloom, or billet. The steel is now ready. This steel is still not in the shape or size we can use. Therefore, these products are called semis. Semis have to be molded into the final product.

Vertically integrated steelmakers like Tata Steel and JSW Steel might carry out molding in-house. Specialist steelmakers such as APL Apollo Steel Pipes buy semis and are engaged only in value addition.

Value addition may be done using hot rolling or cold rolling of steel, depending on the type and grade of steel required. Making steel tubes will undergo different processes. 

Hot rolling happens when the molten metal is molded into required shapes at high temperatures, around 900-1000 degrees Celsius. Hot rolled steel is cooled at room temperature. It is used in applications where the exact shapes and appearances may not be necessary, such as construction, automotive frames, and agricultural equipment, among other applications. 

Cold rolling happens when the molten metal is molded below recrystallization temperatures, around 500-700 degrees Celsius, depending on the properties of the steel. It is used in applications where precision, smoothness, and appearance are important, such as home appliances and automotive parts. It can also be coated with zinc to protect from corrosion, with tin for cans, and with plastic/paint coating for protection and decorative purposes.

Cold-rolled steel is more expensive than hot-rolled steel as it takes longer to make and is used for more specific purposes.

Steel tubes may be welded or seamless. Welded tubes are made by rolling a flat sheet of steel and welding together its edges. Seamless tubes are made by piercing a hole through a hot billet.

I extensively referred to this video to properly understand steelmaking. Take a look if you like.

So far, we have seen how the raw material for steel is sourced and how steel is produced. In the next chapter, we will see how steel is distributed, the role of scrap steel, and the impact of external factors on the steel industry. We will also see a checklist of the parameters to compare various steel makers.

See you in the next chapter.

Key Takeaways

    1. Steel is the most commonly used material in the modern world. India’s per capita steel consumption of 77 kg is much lower than the world average of 233 kg. The industry is undergoing a rapid capacity addition.
    2. Coal and iron ore are the primary inputs for making steel. Coal has a larger cost per ton than iron ore. Coal prices have a more significant impact on steel prices.
    3. Steel is produced using two different methods.
      1. The Basic Oxygen Furnace (BOF) method primarily uses iron ore to make steel products.
      2. Electric Arc Furnace (EAF) recycles scrap steel into steel products.
    4. Steel is a commodity. Therefore, manufacturers do not have much control over its pricing. They focus on vertical integration to control costs and improve margins. Large steelmakers maintain owned iron ore mines, coal mines, power plants, and shipping fleets to control costs.
    5. Value addition by offering specialty steel products is another way steelmakers resort to in order to improve margins.


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  1. Manish says:

    Can you explain types of integration?
    I get confused often between vertical integration, horizontal integration, backward integration and forward integration.

    • Vineet Rajani says:

      Hi Manish, I have explained these concepts in the first chapter. Let me try with an example here.

      Let’s say there is an AC manufacturer.
      Backward integration is when it also starts manufacturing the wires and spares that go into an AC. Manufacturing the raw materials and inputs that you would generally source from outside is backward integration.
      If this AC manufacturer, sells its ACs from own retail outlets, or through own distribution network, it is forward integration.
      Backward and forward integrations make a company vertically integrated.
      If this AC manufacturer also starts manufacturing refrigerators, it is horizontal integration. It is getting into a business that is similar to the existing one.

      The steel manufacturing value chain is roughly like this. Mining iron ore and coal – making iron and steel – making value added steel products – distribution to the customers. “Making iron and steel” is the primary function. Engaging in all other functions is vertical integration.

  2. Rakesh says:

    Hi Vineet,

    Thanks for detailed explanation on Steel. Can you please provide me details on how the manufacturing process of Green Steel? As the EU imposes CBAM on steel which uses Coal as major ingredient and is restricting the import of steel which uses coal fired blast furnace.


    • Vineet Rajani says:

      Hi Rakesh, any steel produced without the use of fossil fuels is green steel.

      Let’s say there are two manufacturers, A and B, producing steel using EAF method. Basically, both are recycling steel. If A is using only renewable energy to run the EAF and B is using thermal power to run it, A is producing green steel and B is not.

      Manufacturers around the world are exploring other greener options, too. Each of them could have a unique but green manufacturing process.

  3. Rakesh says:

    Hi Vineet,

    Thanks for the reply. By the way, what does EAF method means?

  4. Sumantha Saha says:

    Hi Vineet, Amazing explanation. Can you share your framework for analyzing a sector? I mean the real stuff like where to start (Research Reports/ Annual Reports, etc.), where to get the data, and summarizing the whole value chain, etc.

    Thanks and regards

    • Vineet Rajani says:

      Hi Sumantha, thank you. 🙂

      I usually start by looking at the “Management Discussion & Analysis”, business-overview, and performance highlights sections of a few companies in a given sector. This gives a fairly good picture of the key parameters to look at. As for understanding the supply chain, while you can get a lot of content on Google, it is better to talk to someone from the industry to cross-check your understanding.

      Besides, I get economy-level data from https://cimsdbie.rbi.org.in/DBIE/#/dbie/home.

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