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Steel: Not just price rise - Views on News from Equitymaster
 
 
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  • Mar 18, 2004

    Steel: Not just price rise

    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.

     

     

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