Steel: Pricing dilemma? - Views on News from Equitymaster

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Steel: Pricing dilemma?

Apr 8, 2008

With inflation raising its head above comfortable levels and the government under pressure to rein in the prices of primary and manufactured products, there have been consistent news flows regarding lowering of import duties and higher taxes on exports. A similar predicament is faced by the steel industry, where sky rocketing prices of key inputs like coal and iron ore have led to manufacturers facing the compulsion of raising final product prices on one hand and pressure from the government to not do so (and actually reduce prices) on the other.An indication of the cost pressure on steel producers can be gauged from the hike that BHP Billiton and Rio Tinto Group (world's largest and third largest mining companies respectively), world's largest miners of raw materials like iron ore and coal, are asking from their customers. For instance, as reported on Bloomberg, these miners are expected to win an 85% increase in iron ore contract prices in 2008. If this was not enough, even coking and thermal coal prices are expected to rise significantly over the next few months. This is indicated by the fact that Posco, Asia's third-biggest steelmaker, has agreed to a tripling in benchmark contract prices for coal. Based on these spikes in input costs, industry experts are anticipating a 20% increase in finished steel prices during the current year.

As a matter of fact, contract prices for key inputs for manufacturing steel have risen for a record sixth straight year as China (largest buyer of iron ore) boosts output of the metal (steel) to feed its construction boom. Even in India, strong demand from industries like construction, infrastructure, automobiles and electricity has led to steel demand remaining strong over the past few years. And if one were to go by the government's infrastructure investment projections for the XIth five year plan (FY08 to FY12), there seems no slowing down on the demand side for steel makers.

If the government were to have its way, steel prices might fall in the coming months. However, there is also a probability of manufacturers hiking prices as, after an extent, they will have to pass on the input cost hike to customers, as we are already seeing in the automobile industry - Tata Motors, for instance, has effected a 3.5% rise in commercial vehicle prices to rein in pressure on profitability due to rising costs.

The aam aadmi, who has already been pinched by rising food prices, can also expect added hit to his pocket from rising prices of manufactured products, from bicycles to motorcars.

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