After months of resisting it, the steel industry did blink after all. Following some tough talking by the government to rein in escalating steel prices, manufacturers, especially primary steel makers, decided to bring down prices of products such as TMT bars and hot rolled coils by almost 15-20% a few weeks ago.
Till then Indian steel prices were more or less neck and neck with international prices. So, when rebar (TMT) prices internationally were in the range of about $1,050-1,100 or Rs 42,000-44,000 per tonne (exchange rate Rs 40 to a dollar), Indian prices were brought down to about Rs 35,000-38,000 per tonne.
This followed the government’s move to levy an export duty on semi-finished steel and galvanised steel as well as remove the customs duty and countervailing duty on steel-making inputs and TMT bars. Hot rolled coils, another key steel product, quoting at the same level as that of rebars in the international market, was brought down to about Rs 38,000-40,000 per tonne.
This wasn’t the end of the story, though. The Centre managed a further reduction from steel makers to the extent of Rs 2,000 per tonne on rebars and Rs 4,000 per tonne on hot rolled coils. So, rebars are now priced at Rs 33,000-34,000 per tonne and hot rolled coiled at about Rs 35,000-36,000 per tonne. This has been done following an assurance from the government that 15% export duty on semi-finished steel and 5% export duty on galvanised steel will be brought down substantially or phased out.
Privately the government has also assured players that the prices of steel-making inputs as well as freight rates will be kept low. The question: is this policy sustainable at a time when both steel and its raw materials such as iron ore and coking coal have been running firm in terms of their international price. Says a steel player on condition of anonymity, ?For now these prices will be maintained. Let’s see what the government does in terms of controlling input costs, which has been the cause of the hike.?
If input costs are contained, margins of players will not be impacted significantly. But if they are not contained, a hit on bottomlines is inevitable. Says Seshagiri Rao, director, finance, JSW Steel, ?We anticipate bottomlines to get eroded by 10-12%.?
What caused the government to intervene on the steel price front has been the impact it has had on user industries such as engineering, auto, construction, etc. The pressure has been so severe on users of steel as well as cement, another product on the radar of the government, where a ban on exports exists at the moment, that apprehensions were being expressed of projects getting derailed due to this. The construction industry in particular has been badly affected on account of high steel and cement prices. ?We have to contend with land costs, too,? says Kishore Kothapalli, director, RakIndo Developers, a joint venture company promoted by Rakeen, an undertaking of the government of Ras Al Khaimah, UAE, and Chennai-based Trimex. Land costs have been severe but coupled with raw material price hikes the matter gets worse.
Some players in the real estate and construction business do factor in escalation clauses in their contracts to deal with input cost pressures. L&T is an example of this. ?We also work on a cost plus structure, where the cost is reimbursed by the customer,? says YM Deosthalee, whole-time director and chief financial officer, Larsen & Toubro. ?In some contracts we provide for contingencies,? he says. ?All of this takes care of input cost pressures.?
But for those who do not provide for contingencies and escalation clauses in contracts for the fear of losing customers, cost overruns are becoming difficult to handle. By some estimates, project costs in the real estate and construction business have gone up to 40% in the metros alone on account of a steep rise in raw material prices.
In Tier I and II cities, the escalation is a bit lower at about 10-20%. Despite this, says Amit Goenka, national director, investments at real estate consultancy Knight Frank, the increase is substantial enough for players to take a cautious approach to the business. ?Margins have been squeezed on account of input cost pressures.? This is to the extent of 4-5%, which has also affected industry growth projections since developers have been walking away from projects to keep their budgets under check. ?Growth projections,? says Goenka, ?are down from about 30-35% to about 27%.?
It becomes difficult to pass the entire burden of rising input costs to consumers since that could impact overall sales. This is an issue that most automakers have been grappling with for some time. Says Arvind Saxena, senior vice-president, marketing and sales, Hyundai Motor India Ltd, ?We are contemplating a price hike. But we will take a few weeks to decide how much it should be.? Pawan Goenka, president, automotive sector, Mahindra & Mahindra Ltd, articulates a similar point of view. ?I cannot tell you how much will be the hike but it will be there.? The last round of price hikes by auto majors, for the record, was done between January and April 2008.