Current Indian steel market is attaining lots of media coverage. Only a few months back the stories had invariably highlighted the tales of woes the steel producers were passing through arising partially out of global steel recession. There were talks of cutting down inefficient and surplus production capacity. The Secretary General of OECD flew down to New Delhi to have a first-hand interaction and dialogue with Steel Ministry officials alongwith major steel producers. He was generally conveyed that surplus capacity both in flat and long products in the country would not in any manner jeopardise the global market scenario and the emerging domestic demand growth would adequately utilise the capacity in the coming years so that India cannot be a party to contribute in cutting down the 115-120 million tonnes of global capacity that has been identified as surplus. This was only six months back when the media were frequently reporting a surplus of at least 3 million tonnes in flat products in the country, particularly in Hot Rolled Coils.

Compare this with current fleet of news items that are talking of a shortage of HR Coils to the tune of 1.5 to 2.5 million tonnes. Taking the two together, this implies that over a period of 6 months, a surplus of 3 million tonnes has been converted into a shortage of 1.5-2.5 million tonnes.It may mean that a demand growth of 4.5-5.5 million tonnes of HR Coils has taken place in the country during the period. Among the news items highlighting the shortage scenario, none has so far talked about Pipes and Tubes sector which is a major component of demand for HR Coils and all cribbing about the shortage have emanated from the cold reducing sector which accounts for nearly 48-50 percent of HR Coil demand. Out of a current estimated level of consumption of 6.5 million tonnes of HR Coils/sheets in the domestic market, it would have meant a sharp rise of demand from the cold reducing sector from 3.2 million tonnes to 5.5-6 million tonnes (adding 50 percent of the incremental demand of 4.5 million tonnes). On a quarterly basis, it would have given a demand of 1.35-1.5 million tonnes from the cold reducing segment alone.

Let us assume for argument's sake that this is correct. What it means is that the end using segments consuming cold rolled products have suddenly found demand for their products are skyrocketing. To name a few, these are automobile and auto components, bicycle, furniture, drums and barrels, coated sheets and coils, consumer durable (airconditioners, refrigerators, dessert coolers, washing machines etc), agricultural equipment, coaches and other sectors. It would be interesting to look at the performance of a few of these sectors in the recent period.

The above data may not have comprehensively captured the demand scenario of cold reducing segment, but it definitely charts out an indicative path. During 2001-02 the growth observed in CR segment was negligible as observed in the level of consumption of HR which can be best be termed as secular. The above table, however, brings out that demand from these downstream items are more in the initial months of the current fiscal, but fails to account for the spectacular rise in CR demand and consequent shortfall in HR supply that is being frequently highlighted in the media.

The question still remains as to what has triggered off this bogey of shortage scenario. May we get an answer in the price behaviour of these products in the recent period? . It may not be out of place to mention here that a recent analysis of price elasticity has shown that some of the long products, which have large price-sensitive consuming segments, are demanded less with rise in their prices and the price elastic negativity is quite significant. The factoral negativity of demand in relation to price in respect of flat products could not be proved conclusively. The analysis has shown that the relative strength of the price-sensitive sub-sectors in the total consumption of the product would determine the overall price elasticity of the same. Pending a detailed analysis of price elasticity of steel demand, a few market realities may be looked into.

a)   A sharp rise in prices may immediately result in postponement of purchase. But in a processing industry involving continuous production cycle, procurement of raw materials experiencing price hike cannot be delayed as it may disrupt the flow of order for its finished products.

b)   Consequently attempt would be made to pass the hike in prices of raw materials entirely to the finished product prices in order to retain the existing level of margins.

c)   The resistance from the end using sectors to offer a similar price rise to these producers would depend on how much of this increase is being passed on to the ultimate consumers. In a market chain linkage of HR-CR-end using sectors-consumers, there is bound to be a time lag in each of these agents'behaviour and a minimum period of 2-4 months is required for the cycle of price-cascading impact to wind its full course.The current scenario would amply demonstrate that price increases of HR effected in the initial months of April-June have now been fully absorbed, and the process of price absorption effected in July-August is still on.

d)   While this cycle is continuing, there is always an apprehension that the end using segments may fail to offer the price hike occasioned by increase in raw material prices which is threatening to be a frequent affair in the coming months. This leads to increased demand for inventory building of the raw materials in anticipation of its further price hike. Current statistics have shown that stock deceleration has taken place at the HR producers' end and shifted to CR producers.

e)   Thus enhanced demand for HR is partly due to increased demand by the end using sectors and partly by the rise in demand for stock building. It is needless to mention at this stage that in a rising market this phenomenon is universal in its application. For instance, there is a similar urge to prepone purchases of inputs,stores and spares required for steel making for items not covered by long term contracts.

f)   The third component of rise in demand for HR may be explained by the significant rise in global prices of Galvanised products that have brightened the prospect of high export realisation of GP. This is a product, which is outside the purview of anti-dumping and countervailing duties imposed by USA and enjoys the exemption criterion extended to India. Coupled with a recent DEPB benefit of 18 percent of the FOB value for GP, the net export realisation is very attractive. As some of the HR manufacturers are themselves GP producers, there is a normal incentive to transfer larger tonnages of HR for downstream products. With domestic prices of CR and GP rising, plain market realities would strengthen this tendency. Thus more HR is demanded to be used in GP via CR and for export purposes. And for export of downstream items the duty free import of inputs like HR is permissible under Advance Licence route and exporters have been regularly using this to meet the requirement of inputs without the burden of customs duty.

g)   The fact remains that during April-July'02 the availability of HR in the domestic market by the major producers at a level of 2.02 million tonnes is nearly 25 percent more as compared to the level in the first four months of the previous year. The increased availability has catered to meet the demand from Pipe/tube segment as well as from the Cold reducing segment. As the media has not yet come out with any stories concerning shortage of HR supply from the Pipe/tube segment, it can be concluded that demand growth from the cold rollers has outstripped the supply growth of 25 percent.of HR in the domestic market. The above facts,however, hardly prove this.

h)   The production by the stand-alone CR units (units without HR making facility) in April-July'02 may at best be assessed at 9,00,000-9,50,000 tonnes as media could not report this figure or obtain it from the sources cribbing about the shortage scenario which could have comprehensively put at rest all the hype in this regard. Even assuming CR production by the stand-alone units at this level and the actual availability of HR in the domestic market as given above, the shortage of HR cannot be established.

What actually triggered the bell of anger from the stand-alone units is supply of HR at a price which would have enabled them to sustain their margins. Market realities have taught us that price cascading impact has an in-built time lag before it is fully absorbed. Had the price rise in HR been not so frequent, the cribbing on shortage would have been much less. From the point of view of HR producers, the experience of last two years has been rather harsh on their bottomline and the stand-alone units have been used to a scenario of excess supply of basic input at a decreasing price. While the abrupt change in the scenario has shocked them, it has compelled HR producers to make good the losses as expeditiously as possible since steel cycle in the recent period has been proved to be rather short.

(These are personal views of the author)