When steel, cement catch a nation unguarded

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New Delhi, Apr 2 : Curbing any rise in prices of steel and cement, both important constituents of the construction sector, has been a top priority for an embattled government, struggling to tackle the rising inflation. The wholesale price-based inflation shot up to 6.68% for the week ending March 15, a 13-month high and much above the Reserve Bank of India's tolerance level of 5%.

While cement companies reportedly increased prices by up to Rs 7 per 50 kg-bag, in some comfort to the government, steel secretary RS Pandey on Wednesday told reporters after a meeting with producers that primary producers would hold their steel prices. He added that secondary steel producers agreed to restrain exports to give a boost to local supplies.

Steel prices have gone up from an average of Rs 29,000-30,000 per tonne during May 2005-January 2008 period to around Rs 33,000-34,000 per tonne. And the government does not have much headroom in reducing the duty on steel as the current rate on import tariff is just 5%.

Cement and steel have a combined weightage of nearly 7% in the wholesale price index, with cement and cement products having a weightage of 2.16%, while that of iron and steel and related products is 4.73%.

Falling in line with the concern of the government, secondary steel producers also volunteered to import an additional 0.6 million tons of hot-rolled coils in addition to the one million tons being imported annually. This would help in stabilising steel prices by increasing the availability of steel in the country. Steel prices in the last four months (December-March) have risen in the international market from an average of $300 per tonne to $900 per tonne. In comparison prices in domestic market have risen by only Rs 6,000 during the same period.

For the third consecutive month in February, the average prices in Mumbai for every 50 kg cement bag had risen to Rs 249. It went up from Rs 125 per bag in 2001 to Rs 158 in December 2005 and further to Rs 231 in October 2007. According to Centre for Monitoring Indian Economy (CMIE), the cement demand grew by a robust 9.5% in April-January 2007-08 against 9.9% during the corresponding period a year ago.

CMIE added that, however, cement production grew by just 5% in January 2008 and the growth in production of cement in April-January 2007-08 fell to 7% from 10.6% during the same period last year. According to the government, the cement prices were more or less stable until December 2005, but has been rising significantly since then. The industry is expected to add 100 million tons capacity till 2011-12. As against the installed capacity of 177.83 million tones in 2006-07, the cement production was 161.66 million tones, according to Cement Manufacturers' Association.

Anil Baijal, senior advisor, Infrastructure Development Finance Corporation, said, "This (rise in prices of cement and steel) will have a cascading effect on all the construction activites. Since these are de-regulated commodities, though there could be genuine reasons for rise in prices, there could also be instances where market forces exploit the available opportunities. Therefore, sometimes the government has to intervene and manage the supply side to control inflation."

Vinayak Chatterjee, co chairman of CII National Council on Infrastructure and chairman Feedback Ventures Limited, said due to the rise in prices of cement and steel, contractors would be the sufferers in fixed price contracts, while the developers would be affected in price-linked contracts. "But consumers will be hurt the most as ultimately these price increases and losses would be passed on to them," he said.