Pressure mounting on steel producers to maintain margins

Written by Sushim Banerjee | Sushim Banerjee | Updated: Aug 13 2013, 09:10am hrs
There was an attempt to raise steel prices by around R1,000-R1,500 a tonne by some major producers at the beginning of this month. This was on two accounts of exchange depreciation that has increased the landed cost of imports and an anticipated inventory accumulation in the system. It is a bit early to conclude that the market is finally absorbing the rise.

While the domestic price of HR is approximately R2,400-R3,000-a-tonne lower than the landed import cost, the demand scenario is still grim. The government is however making a sincere endeavour to clear the policy logjam, which is stalling a number of infrastructure projects.

Regrettably, the hawkish monetary policy of the RBI is too occupied with holding the price line at the cost of creating momentum in the economy by easing the interest rate, which alone could have boosted demand and investment.

But steel prices are rising in China, a factor that can definitely influence the movement of international price. The reinforcement bar prices have increased by $ 20-25/t and HR Coils prices rose by $25-30/t in China last month.

Also, the international prices of iron ore has gone up from a level of $110/t to $132/t in the past two months.

The last to join the price volatility appears to be NMDC, which is lowering down the prices.

For instance, the prices of pellets have been brought down by R200 a tonne to R4,300 a tonne ex-works. And fines at R2,510 are being made available. It would be interesting to watch the prices obtained in the auctioning of iron ore at Karnataka.

As rising international prices and falling exchange rate are making imports of iron ore an unviable proposition, the recent move by NMDC would offer marginal relief to the domestic steel producers without captive mines.

The import of melting scrap being non-viable due to falling rupee exchange rate, the demand for sponge iron by Induction Furnace units is likely to increase and it would lead to more requirements of iron ore.

The pressure on steel producers to maintain the margin is mounting. The drop in coking coal prices and the flatness in the current level of prices has been fully neutralized by rupee depreciation of 15.6% in the past 6 months. Along with increase in steel prices, the Chinese import of coal in first seven months (187 mt) has gone up by 14%. Further the rise in import of iron ore by China (457 mt, 8% growth) in the same period indicates growth in Chinese steel production and consumption.

There is no perceptible shift from investment to consumption as the primary factor contributing to GDP growth in China and it would be happy to clock 7.7% growth in Q2/Q3.

Similarly a higher GDP growth in India is very much incumbent on investment and suitable pricing and availability of raw materials must be ensured to facilitate investment for capacity augmentation in steel sector.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal