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The financial results of the major steel companies in third quarter of current fiscal have made many of us believe that downturn in steel is over. And if the big rise in steel prices specially in the flat categories has demonstrated that bright days are here again, the issue has also invited adverse comments from the user segments. Their inability to pass on the increase in raw material costs to the price of the finished goods has drawn sharp reaction as this has reduced their margin to such a level that carrying on business may soon become uneconomical.

If the domestic availability becomes so costly, the argument goes, it is incumbent on the government to bring down the customs duty rates so that import becomes a viable option. This is a perfectly legitimate demand from the user segments. It is therefore all the more necessary to know the facts of the case as sellers and buyers are the only two players on the field and anyone's withdrawal results in calling off the game.

The product in question is Hot Rolled Coils, a mother product for Sheets, Plates (upto 20/25 mm thickness), Cold Rolled, Galvanised, Pipes and Tubes. The major user segments for all these items fall under automobile and other consumer durables, construction and tubular products categories. Any price fluctuation originating in the mother product is bound to cause a ripple in the prices of these end products, both downwards and upwards. Naturally the extent of increase hinges on the steel component in the end product.

For a typical passenger car, the average steel component is, say 350 kg valued at Rs.8750/-( an average price of HR/CR and Galvanised). This constitutes of not more than 4.6 percent of the total price of the car( Base price of Maruti 800: Rs.1,89,400/- ). If the price of HR goes up by, say, 40 percent over a period of last 9 months, the cost component in the total price of Maruti rises by 1.85 percent only. With a inflation rate of 3-3.5 percent, the real increase in the price of car due to increased price of steel is negligible and need not affect the decision of the purchaser.

On the other hand, when the prices of HR were observing a secular decline since middle of 2000-01 to March'02, we have not heard anything on the magnanimity of the automakers to pass on the reduced cost of inputs to the consumers. What has been observed was a periodic rise in prices of all models of passenger cars during the past few months, albeit by not more than Rs.3000-Rs.5000/- per car due to rise in cost of inputs and this has been instantly absorbed. Thus the extent of price rise in the final price of a passenger car being not more than 3-4 percent, may appear to be much less than 40 percent increase in price of HR. But the rise indeed exceeds the real impact (1.85 percent).

There are items like Tube-making where the cost component of steel is 70 percent or more and a 40 percent rise in price of HR may take some time to get absorbed unless the price of finished Tubes rises by 28 percent. Here also empirically it has not been proved that declining prices in HR in the past few years has benefited the ultimate buyers. The issue involved is the squeezing of the margins that steel users have been used to during the earlier long phase of price reductions of steel inputs. And this is most evident by looking at the cost of raw materials in the balance sheets of the major cold-reducers. The operating profits of some of them were more than double than that of the raw material suppliers.

The comparison of movement of final prices of an end product with that of steel item is misleading so long as it does not mention about the cost component of steel in the final product. Thus a 40 percent rise in steel prices can be equivalent to a 5 percent rise in price of an item where steel component is nearly 13 percent of the total cost. However there are instances when the increase of even this minimum extent has not been absorbed by the customers. The underlying reason must be found in the demand-supply-capacity nexus that is specific to the segment and goes beyond the scope of price rise in the basic steel input. This holds good for two-wheelers, cycle, furniture and a host of other consumer durable items. The capacity build-up in these segments coupled with stiff income-elastic demand camouflage the nature of market absorption of increased price of steel inputs.

It is also considered a noble cause on behalf of all the basic steel manufacturers in this country to supply the mother product at a price which should enable the re-rollers to maintain a reasonable rate of return on their investment. Any attempt by the former group to return to a price level that was prevailing earlier is frowned upon and an immediate government intervention is called for in an otherwise liberalised market. A look at the quantum of increase in steel prices would elaborate the point.

It appears that HR prices in the domestic market has a direct linkage with movement of prices in the international market. As regards the quantum, the prices in December'02 is marginally higher than the level prevailing in June'2000. But considering the rise in cost of steel making during the period on account of rise in prices of basic inputs like coking coal, power and melting scrap/ sponge iron alongwith exchange rate depreciation, the rise in prices of HR has enabled the producers to operate at least at June'00 level. The price rise may, therefore at best be called a price adjustment and correction which the current market has offered. If the global producers are able to obtain a price increase for their products due to market dynamics, the basic steel manufacturers in the country can lag behind only at the risk of being bankrupt.

The current ex-works price of HR Coils stands at an average US$ 325 per tonne. This is at least US$ 10-15 per tonne less than the CIF price of HR Coils from the cheap source of Ukraine. Thus import option may not be considered a viable proposition, neither the consistent demand by some of the agencies to bring down the customs duty rates on HR Coils to facilitate imports is going to benefit them. On the other hand with enhanced global prices the export opportunities for HR alongwith DEPB benefits appear relatively more attractive as opposed to supplies to the domestic market. But this is not going to happen as attachment with the domestic consumers far outweigh the momentary financial gains for HR steel manufacturers who are at long last getting a positive return on the massive investment incurred for modernisation and setting up of steel plants.

(These are the personal views of the author)