Sushim Banerjee

Current steel prices are making headlines almost everyday now. It is being reported that steel price is one of the major contributors to the overall increase in wholesale price index. A little analysis would put the thing in right perspective.

Thus while both primary and fuel and lubricants have contributed 1.4 percent each to 7.5 percent increase in WPI indices during the last one year, the prices of manufactured products has led to a 4.53 percent growth in prices. And out of the manufactured product prices, the prices of iron and steel items have contributed 1.6 percent to the overall price rise. This implies that around 21 percent of the general price rise in the last one year has been accounted for by prices of iron and steel. Under any counts this is substantial and unprecedented.

What could be the reasons for such a hike? The direct linkage of domestic steel prices with international prices is frequently being cited as the prime cause. Till a few months back it was presumed that flat product prices (HR Coils, Plates, CR and GP) were directly related to the movement in global market, while the long product prices (Semi-finished steel, Bars & Rods, Sections etc) are more influenced by domestic demand and supply phenomenon and the linkage, if any, works indirectly and with a time lag. This appears to be no longer true. With the onset of globalisation and widespread use of electronic media, the fluctuations in global market have an instantaneous bearing on the domestic market. Steel trading community with its ready access to international market events influences market perception to a large extent. For instance, if Arcelor announces a rise in price quotation for HR for the next 3 months by, say $ 30/t ex-works for its sales in EU market, the price in Indian domestic market is presumed to be going up by not less than Rs.700-1000/ per tonne in the next month. The market is perceived to have accepted such rise. The same forces would work in the opposite direction for long products in Indian market for any news of an anticipated drop in melting scrap prices ex-Rotterdam or the trading prices of scrap ex-Dubai. A few relevant statistics are worth mentioning.

The extent of increase in global prices exceeds that in the domestic prices, but the trend is uni-directional. Domestic price of HR in USA has gone up from $ 349 in Oct-Dec'03 quarter to $ 728 in July-Sept'04 quarter, a rise of 109 percent within a span of 9 months. In Germany the domestic prices of HR during the same period has been raised by 58 percent. Is it therefore fair to term the recent increase in steel prices in the country as import-led?

Not exactly if one looks at only the finished product prices. Inflationary impact is imported via raw materials also. The cost of those finished steel items dependent on imported inputs like Bars & Rods (influenced by imported melting scrap prices) and HR (imported coking/ non-coking coal) is enhanced and reflected in higher market prices. During Sept'03 and August'04 imported coking coal prices recorded at around 140 percent enhancement leading to huge burden on all those steel manufacturers who are finalizing deals on long term perspective. During the same period the imported price of melting scrap has gone up by 27 percent. The cost of production of steel, both long and flat, is thereby adversely impacted. The point to be noted here is the absorption capacity of the market. If demand for these steel items had been poor, the market would not have warranted such hike and the prices of finished items would have been rolled over. The resistance to price hike is only strengthened by low demand which has not happened.

The factors so far identified are upward movement in global steel prices, rise in imported input prices and high demand growth -all these have sustained a level of steel prices in India which is unprecedented. Another simple calculation may highlight this aspect. The average cost of production of Sponge Iron ( with iron ore pellets and coking coal as major inputs) is approximately Rs.8500-9000/- per tonne.The ex-works price of this item varies between Rs.10500-12000/ per tonne, a mark-up of Rs.2000/ and is available at Rs.13000/ per tonne at major consumption points. Imported Heavy melting scrap is available at $ 260-270 C&F with landed cost at major consumption point approximately Rs.15700/ per tonne and sold at Rs.16500-17000/-. With 40 percent sponge iron and 60 percent use of melting scrap in the charge-mix, the cost of production of ingots comes to Rs.19500/ per tonne with normal conversion and burning losses against the final selling price of Rs.22500-23000/- per tonne leaving a cool mark-up of Rs 3000/. The cushion in the ruling premium determines the strength of market demand.

A very attractive export market particularly for the flat items exerts an upward pull in the prices of domestic steel. Not long ago, the steep declining trend in the import prices of HR Coils had resulted a downward pressure on the domestic prices through a threat perception of anticipated imports. This invisible hand of market-led perception is at the root of the recent pricing phenomenon. A direct offshoot of globalisation, the market sentiment that also thrives on speculation and hedging matched by inadequate appreciation of all the relevant factors would continue to influence the pricing trend in the market. In response to user segments' frequent demand for lowering down of customs duties on steel to supplement domestic availability, the current rates of 10 percent are likely to be brought down to 5 percent, comparable to the duty levels in many developed countries. A 5 percent reduction in customs duty implies a fall in landed cost of HR Coils, Billets and CR Coils by approximately Rs.1200/-, 905/- and Rs.1530/- respectively at the current level. Would that encourage the users to turn to imported sources? In case the global prices move up further, which is quite likely, it may rob the advantage of a lower duty. The inevitable imports, irrespective of the periodic fluctuation in prices are not going to be affected by duty levels. The substitution of domestic availability by imported goods, unless guided by a substantial gap in landed costs to take care of all the hassles of imports, may take place by a sufficiently lower extent. On the other hand, a reduction in customs duty on melting scrap and shipbreaking scrap may enhance the availability of these vital inputs for production of ingots. The hefty price addition at every stage of value addition can be checked. Ultimately, however, the market sentiments would determine the efficacy of a specific policy measure.