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Inflation in an economy, and for a sustained period, occurs when the key drivers start getting costlier by the day. Apples, oranges and bananas don't affect an economy beyond a point. Their rise or fall doesn't empty pockets the way fuel and steel do. And why? Because the increase in prices of food items, despite their sometimes steep rise, is temporary and doesn't affect other fields. The same can't be said of the likes of crude-oil prices and metal like I & S. We take the case of steel that's most talked about these days.

We use steel in varied forms. For homeowners, it starts with utensils, furniture, FMCG products and so on. For industry, it could be as raw material as is the case with steel units themselves, infrastructure projects, and transport and logistics fleets. A rise in prices across these sectors results in a cascading effect on the costs of everything in the economy. Prices also invariably rise when more steel gets exported than sold within the country because of better prices abroad, despite substantial demand in the latter. While it could be great for the steel companies themselves, they add to inflation at home.

In the Indian context, something similar has been the case. Steel was being shipped out to the US and Europe, commanding prices as high as INR 75000.00 per MT of HRS till a while back. Then came the Russia-Ukraine war in Europe, the cutting off of Russian gas to Europe and the consequent likely closure of steel units besides other businesses in general in Europe.

While it signalled good times for the I & S industry, given Europe's precarious position, there's more to it than meets the eye, given that the war could engulf other countries besides bringing down economic activity in Europe, resulting in a fall in prices in time in a few months.

The real good news for India (while eastern Europe burns), besides the skyrocketing steel prices in the international markets, is the news of a pronounced almost 1/3 fall in crude prices with Russia ready to reduce prices by nearly USD 25.00 per barrel over Iraq's USD 110! This would reduce our transport costs and expenses on power generation, given that most steel units in India run on captive power plants that run on diesel.

What's been adding to the situation for the I & S units in India has been the massive, massive push by the GOI in infrastructure projects. Never in the last 75 years since the country's independence has India seen projects in such numbers and magnitude taking place almost simultaneously all over the country. Be the road, rail, air or now even sea, besides significant investments in warehousing and logistics, the country is going through an infrastructure turn-around touted to bring it at par with the likes of the west and China.

While this may be reason enough for the I & S industry to uncork their celebratory champaign given that they have large markets both within and outside India, the building and infra industry thinks otherwise. With exports seeming lucrative, the I & S industry has always been looking abroad to earn its fortunes. That was till the GOI put the brakes in the form of export duties in the month of May 2022.

With India yet slowing moving out of the covid hangover and GOI's steps coming into effect, HRCs by the tons are stuck for want of customers, be they in factories, ports or other inland locations. With weak off-taking, prices of HRC have headed south to the extent of INR 50000.00 to 55000.00 PMT.

Indian industry, having smelt a great opportunity to buy cheap, has been harvesting this windfall before the GOI takes back the export duties on I & S (they have promised to do so as per confirmed sources), which has resulted in last week's rise of 2000.00 PMT in prices.

While a promise of good times exists for the I & S industry both within India and abroad, and for the infra and realty industry within the country for a short while, the real dampener could be coal, an essential in steel production in more than one form, both within and outside the furnace. As India's luck would have it, even this part is being taken care of partly- within fast-paced experiments looking to replace coking coal by "reducing" coal with hydrogen. The only dampener in the near and foreseeable future for the I & S industry could be coal for power generation.

But with so much happening on the positive side, a few negatives shouldn't deter India.

(Author: Vedant Goel, Managing Director, Neo MegaSteel LLP)

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