In the next three decades the deregulation of the steel market (abolition of freight equalisation) and imports having been put under open general license led to a paradigm shift to the concepts of supply, capacity creation through differential technologies, SME’s role, demand assessments, competitiveness, pricing and export strategies.
Commodity pricing in a deregulated economy is an interesting subject. In a non-perfect, near-oligopolistic pattern of the market, at least for major product categories, like steel in our country, the market prices reflect the relative strength of demand and supply. It may be recalled that prior to 1991, steel prices were pre-determined by official agency (Joint Plant Committee) based on inputs (supply prospects) from major producers and demand assessments by the important end using segments like railways, power, defence and others. In order to provide uniform category-wise prices throughout the country unspoilt by variation in transport costs from the producing plants, a freight equalisation policy (assuming rail freight for 1000-km distance) was an added feature of the pricing and distribution policy. The demand from the critical sectors being known, the producers were advised to cater to their needs fully before opening it up for others. This was necessary as imports were negligible due to a high tariff wall. Exports, long considered as surplus steel available after meeting the domestic demand was a bonus.
In the next three decades the deregulation of the steel market (abolition of freight equalisation) and imports having been put under open general license led to a paradigm shift to the concepts of supply, capacity creation through differential technologies, SME’s role, demand assessments, competitiveness, pricing and export strategies. While demand creation was the result of a planned economic journey of various interdependent sectors, the supply got regulated by domestic and export needs. Most interestingly prices got corrected on relative strengths of supply-demand and the movement of global prices. Thanks to the spectacular growth of information technology, the price movement data of raw materials, finished steel (domestic and abroad), prices of competing products, fabricated products and all the plausible causes of these price movements are known to the decision makers on real time basis each day.
It is observed that steel prices have dropped in the last one and half months and the phenomenon is worldwide. Interestingly, it is not only the absolute prices, but the spread between major raw material and finished products, between semi-finished and finished steel, between the domestic and export price, between the export price of major exporter and the domestic price of the major importer, for the same category, between HR-CR and CR-GP prices are all thinning. The shrinkage of the spread can only happen when the competitive pressure is at play, although there is a marked difference in the extent of pressures between relevant product categories.
In May’19 the iron ore was ruling at $98.50/t (cfr China), the coking coal (premium variety) was available at $209.50/t (fob Australia). With an assumed factor of production, the major raw material cost was at a level of $273.45/t. The global finished product prices of HRC SS 400 ex-Tianjin port came to $520 /t leaving the spread between the two at $246.55/t. In August of the current fiscal, this spread stands at $257.25/t as both iron ore, coking coal and finished steel prices in the domestic market have declined, but the fall in export prices are higher than drop in raw material prices. The spread between imported billet price (cfr Turkey at $432.5/t) in May’19 and finished TMT export prices at $465/t (fob ex Turkey) stands at $32.50/t which has fallen by Aug’19. The spread between domestic prices of HRC ($586/t ex works China) and export prices of HRC by China (for SS 400 fob China) that stood at $ 520/t leaving a spread of $66/t in May’19 has currently fallen to $48/t in Aug’19. The spread ($163.43/t) between Chinese export prices of HRC that stood at $520/t at fob China and the domestic prices of HRC in USA in May’19 at $683.43/t has currently risen to $176.46/t as the fall in Chinese export prices ($520 to $483) has exceeded the fall in domestic prices of HRC in USA ($683.43 to $659.46).
In the domestic market the prices of semi finished steel (billet) at Rs 42,364/t (average) in May’19 and the domestic prices of rebar at Rs 47,688/t during the period led the spread to reach at Rs 5,324/t. This has since come down to Rs 4,200/t in August’19. The domestic ex-works prices of HRC at Rs 51,403/t (including GST) and the domestic CRC at Rs 58,456/t in May’19 leaving a spread at Rs 7,053/t has since dropped to around Rs 5,800/t within three months.
The importance of keeping a watch on the trend of the spread between finished products and between semi finished and finished steel is to ascertain the relative strength of the influencing variables in each categories. In India, in sharp contrast to some other countries, the widening of the spread between billets and rebar would immediately activate many idle capacities to spring into production thereby making the spread rather short-lived. The thinning spread tends to reverse on the shoulder of a higher demand or on a rising global price.
The pricing phenomenon is not entirely market driven. China has shown that by exchange rate devaluation it is possible to restrain imports and encourage exports (export rebate in taxes) and to provide a well earned breathing space to domestic players. However, the economy has to bear the cost of essential imports, the fear of flight of foreign capital and the loss of bargaining power in the global negotiation table. The pricing strategies have brought about dynamism and innovativeness in modern day marketing strategies.
Author is DG, Institute of Steel Growth and Development
(Views expressed are personal)