If steel scrap is selling at $150 a tonne or below that and the HR coils have fallen below the $500 a tonne mark and all this has happened only in the course of a month or so, it’s all panic and there are definite reasons to be concerned about the dynamics of the steel market, the prices and the business of steel. Importantly, buyers are waiting to see where the slide will stop and they have good reasons to wait. They would not like to be stuck with a contract price higher than the same when they will receive the materials. The seller is desperate on the other hand to do business at any price. The result is that not much business has been transacted but prices are falling. There are only offers and counter offers. There are more speculative calculations and tactical designs than thoughts on cost of production and profitability in the industry today.
Whatever is happening now is sheer stupidity in many a sense but nor less than what had preceded this fall. There were no reasons for the steel prices to rise to such levels.
Demand and supply factors worked fictitiously in the minds of the marketing managers, and most in the steel business thought that the transactions completed in the first seven months of this year at astronomical prices were reflections of real demand and supply conditions in the market and the strength of a new era in economic prosperity.
It is always easy to gamble with someone else’s money. That money is gone today and one is wiser always with one’s own resources. Better sense will be back in the world of steel, oil, real estate and commodities – more importantly, in the stock market. People will buy stocks carefully, banks will not chase people offering them 95% loan for a home buy or a full amount loan for a car. There will be fewer calls from call centres offering free credit cards. Banks will be held more responsible and the governments will enforce better safeguards in the financial sector.
All these good measures will mean a reduction in steel demand. But, on the positive side, lower steel and other raw materials prices will drive the fear of massive cost escalation, which gripped most of the infrastructure and other investment projects in the country. Sanity will back in the world of investment.
Steel prices in India have not fallen as much as they have in the world market. There is no doubt that domestic prices will soon have to adjust to global benchmarks. A further reduction in steel prices is expected, especially in flat products. Perhaps the prices of HR coils will fall to sub Rs 30,000 level any day. At $150 a tonne for steel scrap, sponge iron prices should drop dead. One can expect billets to fall to Rs 15,000 a tonne and long products such as wire rods to below Rs 20,000 a tonne.
At these prices, raw materials prices, steel makers, except for a few, will not make money. Raw materials prices are getting closely adjusted to these conditions, except for coal (coal prices in the spot market have also fallen but the contracts remain intact). Gas and energy prices are also fixed and have the potential to cause significant headache to steel makers.
The author is independent strategy consultant, Steel and Natural Resources