Ahead of review, analysts do not expect a let-up in steel prices

Ahead of review, analysts do not expect a let-up in steel prices
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First Published: Thu, Feb 07 2008. 12 08 AM IST

In demand: The Tata Steel facility at Jamshedpur. The company has increased prices of hot- and cold-rolled coils by Rs2,000-2,500 a tonne, which analysts see as a must in view of rising input costs.
In demand: The Tata Steel facility at Jamshedpur. The company has increased prices of hot- and cold-rolled coils by Rs2,000-2,500 a tonne, which analysts see as a must in view of rising input costs.
Updated: Thu, Feb 07 2008. 12 08 AM IST
Mumbai: Analysts expect steel prices in India to stay at present levels in line with prices in the global market despite the steel ministry’s statement that it could consider setting up a price regulator for steel—a veiled threat to companies, asking them to cut prices of their own accord.
Following a rise of 8-10% in the price of various products by major steel makers, Union minister for steel, chemicals and fertilizers Ram Vilas Paswan had said the government had taken the rise in steel prices very seriously.
“We want to increase the per capita consumption of steel and as such, rise in prices will have to be reasonable,” he had said. Steel makers had cited rising input costs and increasing global steel prices as reasons for the increase in prices.
The ministry is due to review the price hike on 15 February and is expected to meet all major steel makers before that.
Experts say nothing of consequence is expected to come out of the meeting because it will be difficult for the government to bring steel prices down if the global trend continues.
In demand: The Tata Steel facility at Jamshedpur. The company has increased prices of hot- and cold-rolled coils by Rs2,000-2,500 a tonne, which analysts see as a must in view of rising input costs.
Steel is a global commodity, they add, and its prices move in line with global trends. That apart, the government relaxed its control of the steel business in 1991, allowing manufacturers to set their own prices—for sale within the country and outside.
Over the past few years, demand for steel has risen in tandem, with India and China making considerable investments in infrastructure build-up and manufacturing. This, coupled with rising costs of iron ore and coking coal, have put pressure on global steel prices.
Last week, major steel companies in India raised prices by Rs1,500-2,500 a tonne, with Tata Steel Ltd increasing prices of hot- and cold-rolled coils by Rs2,000-2,500 a tonne.
Some analysts view the recent rise in steel prices as a necessity, with the cost of raw material having gone up by over 50%. Most Indian steel makers depend on imports for critical raw material, barring a few integrated players such as Tata Steel and the Steel Authority of India Ltd or companies with captive sources of iron ore and coal.
The rising cost of imported coking coal and iron ore has forced the domestic steel makers to raise prices.
“Much of the steel price rise was warranted, given the uninterrupted rise in the input costs globally. We are just following the global trend,” said Hitesh Agrawal, head of research at Angel Broking Ltd, a Mumbai-based domestic brokerage.
To offset rising costs, Paswan said he proposed that the finance ministry remove the 5% import duties on metallurgical (met) coke, a key input, and scrap iron.
Even this, some experts say, will not be enough to bring prices down. “Doing away with the import duty on met coke and scrap iron is not going to be enough of a reason for the steel makers to be willing to bring down the prices,”said an analyst with a domestic brokerage, who did not wish to be identified.
Many analysts say the government will not take the extreme step of regulating the sector. “It is very unlikely that the government will follow the same route as it did with cement. The prices are expected to remain firm, unless the government takes certain major steps to bring the costs down,” said Giriraj Daga, an analyst with Khandwala Securities Ltd, a domestic brokerage.
Last year, finance minister P. Chidambaram had levied an additional tax on cement sold at a price higher than Rs190 for a 50kg bag, in order to control prices (and inflation).
In January, the Tamil Nadu government warned that it would take over factories of private cement firms if they did not lower prices immediately, following soaring prices and allegations of cartelization by private cement companies over the past few months.
The government is worried about inflation, which will be affected by the increase in steel prices.
Wholesale price-based inflation rose to 3.93% for the week ended 19 January and is still well below the central bank’s comfort level of 5-5.5%, but this does not reflect the real scenario as the government has not yet increased fuel prices, though global crude prices are up substantially.
“Steel has a greater impact on inflation, so given the recent commentaries by the Reserve Bank of India governor Yaga Venugopal Reddy and finance minister P. Chidambaram about inflation, a rise in steel prices takes much more importance,” Agrawal of Angel Broking said.
“At the 15 February meeting, they (the ministry and companies) could arrive at a work-around formula. For instance, the steel makers can agree to make a token reduction in steel prices, say by Rs500 a tonne, or may agree to not raising prices again for the next three to six months,” said an analyst with another domestic brokerage, who did not wish to be identified.
Not everyone is convinced this will happen.
“I think there will be another price hike in March as it is really a necessity for the steel makers to because of the input costs,” said a metal analyst at a Mumbai-based brokerage, who, too, did not wish to be named.
A recent report on steel outlook for 2008 by credit rating agency Fitch Ratings Ltd says, “Domestic steel prices trends are expected to be driven more by international prices.” Fitch expects the global steel price to increase by about $35-50 (Rs1,386-1,980) per tonne.
Even that, the report adds, would be about half of what would be required to pass through the increase in costs.
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First Published: Thu, Feb 07 2008. 12 08 AM IST