The government actions still lack strong logic. Interventions have been continued in desperate efforts to bring down steel and steel products prices. This time the focus is on the retail market and the prices of steel products such as pipes and tubes. The government or for that matter the steel industry certainly have reasons to ask the pipe makers why they are raising prices to market conditions while enjoying the advantages of having HR coils at below the market prices. On the issue of retail prices, perhaps what is happening now and a situation like this was well expected. The government may have been successful in forcing large steel producers to cut prices but are helpless against the retailers.
The government does not need to break its head over the retail prices. First, because, they will always be higher than the producer prices as they have to cover additional costs of inventory holding, freight and a margin for themselves. After all they are there to provide a service on payment and not do charity. If there is inflation in the economy, all these cost components are also expected to rise in proportion. Second, the percentage of steel, especially HR coils, going to traders may not be very large. I am not referring to spot sales. Most of the buyers in the spot market may be bulk end users themselves.
But, there is a concern. Steel prices have shot up sharply despite government interventions once again. Whether there has been a supportive rise in demand to make this happen is a different matter but the recent surge has been somewhat speculative as global prices have strongly moved up once again on speculation or for whatever reasons.
What the government needs to see is if somewhere in the system conditions have been artificially created to support such speculative forces here in this market as well to have stronger prices than what a competitive market would have had. The intensity and regularity of government interventions make one feel that somehow government agencies know that there is more to demand and supply in the market to determine prices, which can be handled only by administrative fiats.
The government needs to spell out clearly whether the hike in export duty on iron ore is to conserve resources for future domestic use at all or merely to raise tax revenue. It will certainly make sense to conserve iron ore if there is not much of that to feed the steel makers. How much of iron ore we have in the country needs to be studied carefully by an expert body with larger participation of the industry.
Nothing should be left to speculation or at the mercy of poor statistics and geological knowledge. One has also to keep in mind there is an economic cost to conservation. Who will bear it – the user industries or the miners? There seems to be no thoughts on such larger issues as policies seem to be totally centered around contemporary problems.
Note: A news item was misread and strong and wrong conclusions were drawn on some of the changes the government made in the structure of export duty on steel, in my last piece in this column. No changes were in fact made on semi-finished steel, DRI or pellets. The error is deeply regretted.
The author is independent strategy consultant, Steel and Natural Resources