Pencil ingots produced by the EAF (very little in existence) and Induction furnaces are mainly dependent on melting scrap as well as sponge iron availability and their prices. The import prices of melting scrap have been gradually rising and doubts were expressed at various quarters on its impending shortages. The domestic sponge iron prices, which have a linear relation with imported melting scrap prices, have also been rising. It has also been reported that quite a few sponge iron plants have surfaced in eastern part of the country as well as in Raipur. The fluctuations in prices of all these inputs coupled with non-availability resulted in a sharp upward movement in prices of rerollable scrap that further pushed up the prices of finished products like wire rods, rounds, reinforcement bars and structurals. The recent trend in prices of these inputs can be shown as under:-

Date/Month	Melting scrap (Rs/t)	Sponge iron (Rs/t)
April 2003	10650	9600
May 2003	10800	9500
June 2003	11200	9700
July 2003	11700	10000
August 2003	11600	10500-9800

The jump in prices of ships for breaking was no less spectacular. It went up from $ 190 per LDT in June,2003 to $ 250 per LDT in early August due to reasons partly external to the events in the domestic steel market ( like shippers' problems in Bangladesh, upward revision in freight rates etc). It has since come down to $ 215-220 and arrivals have increased. Correspondingly the prices of rerollable scrap also registered an upward march from Rs.14500/- per tonne in April,2003 to Rs.16200/- per tonne in early August and subsequently came down.

By middle of third week of August 2003 the prices of pencil ingots stumbled and almost reached the level of July 2003. But it is certain that the end of the story is yet to be seen and one is to wait for the stabilising factors that still seem to be elusive.

Various reasons are being offered that may have activated the above unprecedented fluctuations in prices in the shortest possible span of time. Is it the latest Chinese threat on trade actions against Indian exports to that country? If the answer is yes, export diversions to the domestic market would have enhanced the expected availability which has a logical downward pressure on the prices, not the other way round. Another story relating to the Chinese market could have provided the answer. Recent studies done by WSD have indicated a global shortage scenario in steel by end of the current year, which may persist till the middle of the next year. The contributing factors have been cited as spurt in demand in China both by the consuming sector namely, construction, fabrication, water and gas supply related projects as well as by the trade to build up its depleted inventory. Indian exports particularly flat products have observed a more than 30 percent rise in the first four months of the current year as compared to the previous year. Simultaneously there was no slowing down in pattern of domestic demand. Belying the traditional downward trend in steel demand associated with monsoon, it was projected that combination of export growth and healthy domestic market would generate a tight availability scenario. The enhancement in the price level was the only eventuality. But if this is the chain of events, the process would not have been so sharp and adhoc. Speculation contributed largely to fluctuations in an otherwise dormant market. The story of the role of a few prominent dealers at various regions is also doing the rounds. It would ultimately be left to SEBI to probe into the dealings during those few days (1st to 19th ) when normal transactions in steel market did not warrant such weird and uncalled- for fluctuations.

This brings us to the fundamental question of formulating pricing strategy for a steel product. It is too tempting to raise prices for a product when market prices are galloping. However product pricing in steel has an in-built mechanism of tying up with a host of downstream product pricing. The end-using segments having been operating in an entirely different scenario of their own capacities, demand growth pattern, export realisation etc.can face an extremely uncertain future with such a frequent revision in prices of a basic input like steel. And what could be this desired level of frequency of price revision?

This can best be answered in terms of the status of the consuming segments. For project-based requirements the basis for pricing of steel is not to be less than a quarter to match the scheduling of project deadlines. For other downstream users, quarterly or monthly pricing can be adopted depending on the nature of the schemes being operated. For all other spot purchases, prices ruling on the date of delivery may form the basis. In all other countries this broad system of steel pricing have been in vogue. Market corrections have to be suitably built in the pricing mechanism. However immediate price corrections following changes on the previous day are not to be done, as it would surely lead to a panic reaction in the market. The alternative, at least in the short term, is to carry on the inventory. Had this simple step been followed in the latest crisis, the problem would not have been compounded.

On an overall analysis, the rising trend in steel prices has at last enabled the beleaguered steel industry to obtain a fair value for their products. For whole of 2001-02 and a large part of the last year the declining steel prices had severely affected the bottomline of all steel producers. The recessionary trend in manufacturing and construction segments and strong linkages with the global market especially in the flat products completed the vicious circle of poor demand and low realisation. A question that is frequently being asked relates to the lowering down of the price level of the end products using steel as an input during those periods of downward movements of steel prices. If this has not happened, why complain now? The pricing agreements, monthly or quarterly, provide a mutually acceptable solution to this perennially controversial situation.