Steel: Not just price rise - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Steel: Not just price rise

Mar 18, 2004

The steel industry has been, once again, in the thick of action in recent times. But this time it is for reasons more than just the rise in steel prices. Other reasons that have played a key role in heating up the steel sector include the unabated rise in raw material prices and the hue and cry created by the steel-user industries owing to the unstoppable rise in steel prices. In this article, we take a brief look at the developments in the steel sector over the last few months.

Amidst all the action, hot rolled coil (HRC) prices managed to touch all-time highs at about US$ 570 last month surpassing the highs witnessed during 1994-95. Akin to the international trend in steel prices, domestic prices have also continued to strengthen (see chart above). The biggest contributor, which made this feat possible, is China's insatiable appetite for steel, as it continues to spend huge amounts on infrastructure. Further, with the Chinese economy continuing to register blistering growth rates of 8%+, demand for consumer durables and automobiles have been strong, which in turn gives rise to the demand for steel.

On the domestic front, the Ministry of Steel intervened to rein in the rise in steel prices, which ultimately forced steel producers to partially withdraw the price hike announced on February 21, 2004. While this action by the government was welcomed by the steel-user industries, some others opined that it wasn't fair on the government's part to have intervened and should have had let market forces determine the future course for the industry.

Before this, the government had announced a reduction in customs duty on steel imports by 5% to the current levels of 15%. This was aimed at relieving some pressure of the steel user industries from rising input prices. Further, the government also asked steel manufacturers (especially SAIL and Rastriya Ispat Nigam) to curtail exports so as to improve the availability of steel in the domestic markets.

Commodity Approx. price rise in last 6 months
Iron Ore 185%
Metallurgical Coke 440%
Scrap 175%
Hot Rolled Coils (HRC) 70%
Cold Rolled Coils (CRC) 60%

The rise in raw material prices has been the biggest deterrent at controlling the hike in steel prices. Significant shortage of scrap and coke in the international markets owing to the imposition of high export duties by the US on its scrap exports and the banning of export of coke by China to protect its domestic steel industry, led to a huge spurt in raw material prices in recent times. The steel manufacturers indicated their helplessness in controlling the domestic situation as input prices refused to subside (see table above) putting immense pressure on their margins. In such a situation, steel manufacturers claim that they had no other option but to pass on the increased costs to consumers.

The government's efforts at stabilising steel prices is a positive for the steel user industries, which had been complaining about their margins being squeezed owing to spiraling input (steel) costs. Amongst the largest consumers of steel are the construction, infrastructure, consumer durables and the automobile sectors. However, it must be noted that the effect of the recent measures would be minimal for the consumer durables and auto sectors, as steel forms a mere of 3%-7% of the prices of the final products.

The effect of rise in steel prices on the auto industry was also indicated by Mr. Nandrajog, VP (Finance), Tisco, in a recent interview with Equitymaster, wherein he said that for an automobile, which weighs about 1,000-1,200 kgs, only 50% is steel and the rest is tyres, etc. Considering that all the 500-600 kgs of steel use is of the best quality wherein prices have increased by Rs 5,000 per tonne, it would mean Rs 2,500 increase for half-a-tonne (500 kgs). However, an increase in automobile prices of just about 3% (on an 8 lakhs automobile) is Rs 24,000 whereas the input prices have gone up by only Rs 2,500.

Going forward, raw material costs would be one of the key determinants of the fate of steel prices. Though domestic steel manufacturers have assured the government of withholding any further price hikes till June 2004, in the face of rising input costs, it needs to be seen how the steel industry tackles the situation. Further, with significant capacity expansion plans being already underway by steel majors across the globe, downward pressure on steel prices is only a matter of time.

Equitymaster requests your view! Post a comment on "Steel: Not just price rise". Click here!


More Views on News

TINPLATE 2020-21 Annual Report Analysis (Annual Result Update)

Nov 16, 2021 | Updated on Nov 16, 2021

Here's an analysis of the annual report of TINPLATE for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of TINPLATE. Also includes updates on the valuation of TINPLATE.

SUNFLAG IRON & STEEL 2020-21 Annual Report Analysis (Annual Result Update)

Nov 15, 2021 | Updated on Nov 15, 2021

Here's an analysis of the annual report of SUNFLAG IRON & STEEL for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of SUNFLAG IRON & STEEL. Also includes updates on the valuation of SUNFLAG IRON & STEEL.

A Peek into Tata Steel's Stellar June Quarter Performance (Views On News)

Aug 13, 2021

Tata Steel's June quarter profits were higher than the full-year profits reported for fiscal 2021.

Shyam Metalics IPO: Key Points to Consider (Views On News)

Jun 12, 2021

Shyam Metalics is commanding a strong grey market premium ahead of its IPO next week.

Tata Metaliks Share Price Jumps 8% After Turning Profitable (Views On News)

Jul 14, 2021

A peek into Tata Metaliks' stellar June quarter performance.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

Don't Sell these Stocks if the Market Falls (Profit Hunter)

Nov 17, 2021

These are the 3 types of stocks that you should not sell in a market crash.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Nov 30, 2021 (Close)