Considering the volatility in the steel sector, construction and engineering companies including L&T, HCC, DLF, and Gammon India Ltd plan to approach the National Commodity and Derivatives Exchange Ltd (Ncdex) to restrict their spending on steel.
Since steel accounts for about 20% of the total construction cost of these companies, the plan is seen as critical to hold their costs. The plan also has an advantage in that companies would need to spend just 5% of the amount upfront.
?A volatile steel price coupled with the risk associated in stocking steel products is driving construction companies to book the stock. The platform provides six months window period to block ingot and billet that have about 90% correlation with finished steel products,? assistant vice-president Ncdex Ramesh Iyer told FE. Ingot and billet could be cast into a shape suitable for further processing such as TMT bars.
The platform till November 2007 has witnessed trading of steel to the tune of 2.5 MT and is expected to cross the last year?s benchmark of 3.5 MT. With London Metal Exchange starting steel trading from February 2008, awareness among the steel consuming sectors is likely to go up. Introduction of exchange-traded derivatives at LME would enable all of these activities and price transparency through a forward price curve out to 15 months.
Steel prices have been firm since last two years and are expected to increase with cost of raw material such as coking coal and iron ore is likely to go up, Associate director with E&Y Navin Vohra said.
Another advantage for the companies is that they do not have to pay the entire amount to block the material so they do not lose on the interest as well. Besides, it also help traders through centralised prices, which helps set benchmark for consumers in distant places, Iyer added.
An industry expert, however, said big companies still prefer to invest in land rather for better returns. They could expect better returns by investing in land than diverting the money to buy raw material.
Until now, only secondary producers such as Rathi Udyog Ltd, Kamdhenu and Metro Steel and Pipes used to trade at Ncdex.
Uncertainty in the steel prices has forced the big fish to secure the margins. The only platform for future trading in steel provides buffer for the construction companies.
?The tool is increasingly being used by the companies to limit the expenditure on steel. The sector currently very strong but might show some signs of recession in the later part of this year. The platform would give construction companies an advantage to take delivery of steel products at booked prices even when the market is bullish,? independent metal analyst A S Firoz said.
