Exchange rate depreciation is taking a toll on the Indian economy. Like the proverbial last straw that broke the camel?s back, it has surfaced at a time when the industry has been facing one of the stiffest challenges in the recent period.
During the past six months, the rupee fell 9.5 % and there is no indication as yet whether it would be able to retrieve some value or continue at the current level. Assuming the latter to hold good for some more time, its impact on the steel industry may provide for an interesting analysis. For instance, all the major coking coal importers like SAIL, RINL, Tata and Jindals are importing annually around 26-27 million tonne of coal. SAIL alone imports 13-14 million tonne of coking coal. At the current price of $280 cfr per tonne, the landed cost has gone up by R1,280 per tonne, if compared with the exchange rate prevailing six months back.
For the adverse impact to be totally neutralised, the contractual price of coking coal for FY12 Q4 must come down to at least $255 cfr per tonne. Staggering the supply in anticipation that the rupee will appreciate is effective only for a limited period, unless one can clearly forecast the date of reversal of the exchange rate. Scrap import by India also becomes costly except for the fact that imported scrap prices to India have taken a dip from $472 per tonne cfr Mumbai to $415 (12%) during the past six months for want of demand for the finished product, particularly from Turkey and West Asia.
The steel import volume during the first seven months has come down by as much as 31% against the previous year and the rupee depreciation would further make import less attractive.
However, looking from the users? perspective, the impact of the increased landed cost of, say, HR coils at $630 cfr per tonne has been much neutralised by drop of cfr price from $720 per tonne six months earlier. Here also, the recent downward trend in international prices may come as a rescue. The prices have come down by 12% during the past six months, which have largely neutralised the adverse impact on the user segments.
Steel exports in the first seven months were 24% higher than last year. In May 2011, the average Indian export price for HR Coils was $735 fob per tonne (R35,060) compared to the average export price of $595 fob per tonne (R31,095) in November 2011, a drop in realisation of around 11% as against a fall in rupee rate of 9.5%. Thus, it?s apparent that Q3 ebitda of major steel plants is likely to be hit as the advantage of declining prices is only partial, which would run its full course in Q4 only. Hopefully, SAIL, as a major coal importer, may get a relief by that time.
The author is DG, Institute of Steel Growth and Development. The views expressed are personal