There are reasons for the government to be extremely concerned about rising steel prices, especially when the inflation rate in the country is nearing the 6% mark. Steel may not be one of the largest contributors to that, but, one cannot let it go, especially when one is worried about the real impact of the rise in coking coal prices are to come. Despite recessionary conditions in many parts of the world, steel prices have remained firm.
Steel prices have risen worldwide due to supply constraints – due to inability of steel mills to raise capacity sufficiently and shortages and supply uncertainties emanating from raw materials such as coal, iron ore, manganese ores, etc. It is very unlikely that the steel supply can be raised quickly anywhere in the world in the aggregate to match demand. And, demand has not slowed down sufficiently to take care. Steel demand, with a few exceptions, are largely price inelastic. This means the world will have to wait for a massive recession to see steel prices down.
In India too, it may not be possible to bring down steel prices significantly by any regulatory or fiscal measures. The government has only very few policy tools and even if all of them are applied, the overall impact of that may not be significant without hurting the interest of the industry seriously.
If import duty in steel is waived, the import price, say, of HR coils today, will drop roughly by $50-52 per tonne, excluding the CVED element. This can theoretically bring down prices by about Rs 2,000 per tonne. However, this can happen only when Indian buyers find alternative sources in the world market. But, if the steel producers do not budge and continue to maintain the high price levels, the international suppliers may quickly take advantage of the rising demand emanating from desperate Indian buyers and raise their base price to completely neutralise the impact of lowering of import duty.
If the government attempts raising domestic supplies by forcing exports down through a tax or quantitative curbs, again the results at the end of the day may not be in line with expectation. First, it may unnecessarily hit certain products where there is no alternative domestic sales potential. Some of the markets have been developed with great effort. At the same time, if domestic supplies increase for certain intermediate products due to curbs in exports and the same find way to the international market in the value added form, the country will not see any real increase in supplies of steel in the country and will merely be subsidising exports. Domestic steel intermediates should not be made available to export production, unless it is made by the same producer in an integrated plant. Let the exporters of value-added steel import whatever they want to and export at will without expecting any benefits or subsidies from the government. There is no need to bring in physical controls over these exports. The government should see that capacity in the DRI sector is better utilised to support electric steel-making units to raise steel supplies. These units need higher quantities of lump ore of high quality and pellets.
The author is strategy consultant: Steel, Minerals, and Coal