All seems quiet on the ferrous front again, as the steel industry volunteers to reduce prices for products like long bars and corrugated sheets for the second time in recent months, to stave off punitive action by the government. But such suppressants have a habit of backfiring. The last time round, though overall steel prices saw a few decimal points? moderation in their ascent, dipping to 8.7% in the two weeks after the mid-February restraints were put in place, they rebounded furiously shortly afterwards, rising 27.5% by the fourth week of March. For an explanation, take a quick look at the steel scenario from a market perspective. Consumption demand continues to scale new highs, while the steel industry struggles with capacity constraints. Demand for finished carbon steel, for example, has steadily grown in the 13-14% annual range over the last three years, even as production growth has slumped from its peak of 13% in 2006-07 to just 5% in the first 11 months of 2007-08. If the industry has held down prices, it is by curbing exports. Steel export growth has slid from 9.3% in 2006-07 to 4% in April-December 2007-08, even as import growth rose from around 15% to 60% over this period. Such supply augmentation has its limits, though, and with global steel prices soaring?up 28% in the first three months of 2008?further imports cannot help contain domestic prices. The fact is that steel consumption is buoyant across the world, not least in construction-crazed China, and it is natural that this has an effect on conditions in the Indian market. If demand outpaces supply, prices go up. This is Economics 101.
The government, however, has not yet given up its ?central planning? inclination to look at prices from a cost-plus angle. So, we have the absurd oddity of the railway ministry assuring the steel ministry that a hike in freight charges for iron ore?which evokes hardy ultra-nationalism of yet another kind?will probably not add much to production costs and retail steel prices. If everything in a value chain involving the exchange of money were to merit an extended state-directed discussion on costing and inflation, no economy could possibly work. High prices are a signal, an incentive for producers to invest money and make more steel, not a subject for such public dissection.
