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Steel industry strikes deal to cut prices in exchange for duty drop

Steel industry strikes deal to cut prices in exchange for duty drop
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First Published: Fri, Feb 15 2008. 12 37 AM IST

Updated: Fri, Feb 15 2008. 12 37 AM IST
Seven steel companies agreed on Thursday to reduce prices of construction materials, such as high-strength thermomechanically treated (TMT) ribbed bars and steel rounds used in the construction of apartment blocks and shopping malls, by Rs1,000 per tonne. Hot-rolled coil prices would be brought down by Rs500 per tonne.
The announcement was made by member of Parliament and managing director of Jindal Steel and Power Ltd, Naveen Jindal, in the presence of Union steel minister Ram Vilas Paswan, who had called a meeting to review prices to try and “protect” consumer interests. The populist gesture comes as eight states are expected to hold elections this year, including three next month. Steel prices are set in the open market, but the ministry does plead, from time to time, with industry leaders to ask for consumer relief.
On roll: The SAIL Bhilai plant. The cost of production has been low for steel manufacturers such as SAIL that also own ore mine.
Propelled by a building boom, average steel prices have risen steadily in recent months by Rs5,000-7,000 per tonne in 10 months. The price of hot-rolled coils, which are used to make cars, refrigerators and industrial pipes, has surged 8-9% to more than Rs37,500 a tonne. The spot price of wire bars used in construction is Rs36,250 a tonne.
In a meeting held in the Capital, Paswan raised concerns about rising inflation. He assured industry leaders he would request the finance minister to halve excise duty from 16% for the industry and request a removal of import duty raw materials such as coke and metal scrap. “We must be transparent in letting our consumers know why the prices are going up,” he said.
Fuelled by worldwide demand and rising input costs, prices of domestic long products such as wire rods and bars surged 26-27% over 10 months.
Shortage of steel helped turn India into a net importer for the first time this year, while surging input costs squeezed third quarter profit margins of several domestic firms that have no ore mine of their own. Iron ore is a key ingredient in making steel.
Ore costs have risen 150% from $60 (Rs2,382 today) in March to $150 in December. Coking coal costs have similarly climbed 37% in five months. Ferro manganese has shot up by 40%, from Rs43,000 to Rs62,000 a tonne.
Big producers have a virtual monopoly in hot-rolled coils production and account for 30% of the total production of 18.8 million tonnes of construction steel.
Rising production costs affect companies’ profitability as haves and have-nots: those who have their own mines and those who don’t. Steel Authority of India Ltd (SAIL), the country’s largest state-owned steel producer, and Tata Steel Ltd, the cheapest producer, both of which have ore mines, have seen third quarter profits grow; SAIL’s net profit grew to Rs1,935 crore during the period, up from Rs 1,471 crore. Tata Steel’s profit remained flat with a marginal rise; it reported a profit of Rs1,068.5 crore compared with Rs1,063 crore last year. Several others without ore leases have taken a hit; Ispat Industries Ltd saw a third quarter loss of Rs35 crore and while JSW Steel Ltd’s profit was 10% lower this year.
Some view the latest call from the government to reduce prices as meddlesome, even as companies have unequal advantage over resources.
“The government is asking us to reduce prices but the government is itself pushing up prices of iron ore, increasing rail freight, demurrage and transport costs,” said a Mumbai-based Ispat executive on condition of anonymity.
In a note to the media, Moosa Raza, president of steel lobby Indian Steel Alliance, said, “It would be difficult for the steel manufacturers to absorb all the cost… The need of the hour is to enable the industry to expand by assuring them iron ore security.”
Recently, National Mineral Development Corp. Ltd raised prices of ore fines and lumps by 47% and 22-33% , respectively. Most producers who do not own mines buy ore at a lower contractual rate of Rs1,785 a tonne, according to an NMDC official. Paswan said he will call a meeting before NMDC announces the next price increase in April.
The cost of production for different companies varied according to whether they own a mine or not. Companies such as Tata Steel, which has both iron ore and coking coal mines, worked out to as about Rs19,000-Rs20,000 in the last financial year. For SAIL, it was about Rs18,000 a tonne. For other companies such as JSW Steel and Ispat Industries, it ranged between Rs19,000-Rs 19,500 a tonne, according to data available with Macquarie Securities ( India) Pvt. Ltd.
With raw material prices up, costs to Tata Steel and SAIL have risen to roughly Rs23,000 and Rs22,000 a tonne, respectively. “Costs are up by $100 (just under Rs4,000) a tonne for companies without iron ore or coking mines,” said Rakesh Arora, associate director at Macquarie Securities.
“After taking a hit on the third quarter profits, companies are raising prices to recoup. But the real picture will be clear after they enter into long-term pricing contracts for coking coal in March,” he said.
But many say the real answer to rising prices is more production. “There is an absolute shortage of steel. If prices touch Rs 40,000 a tonne, people would still buy it as it will have to absorb any price,” said Ahmed Shah Firoz, a steel and minerals consultant in New Delhi. “But the long-term implications are that it will raise infrastructure costs and slow implementation of projects.”
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First Published: Fri, Feb 15 2008. 12 37 AM IST