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| Strong Chinese demand may push steel prices further |
| Kunal Bose / Feb 09, 2010, 00:16 IST |
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 A deregulated environment does not mean that the government will abdicate its responsibility on prices, particularly of items of importance to the common man. The self defeating controls on our steel industry like large-scale capacity using the blast furnace-basic oxygen furnace (BF-BOF) route being the exclusive playfield for the public sector and price and distribution were dispensed with in the first flush of reforms. That was also the time our policy makers in a refreshing display of wisdom thought that high tariff barrier – customs on steel were more than 100 per cent in the pre-reform days - encourages inefficiency.
The good that has happened to the Indian steel industry in the post 1991 liberal environment is common knowledge. In the liberal regime the role of the government will ideally be to give the roadmap for growing steel capacity, which steel minister Virbhadra Singh did as one of the first things on taking charge of the portfolio and create the ideal condition for capacity targets to be achieved. The latter including creation of supportive infrastructure, land acquisition and linkages to iron ore mines is proving to be a daunting task.
Unfortunately, notwithstanding total decontrol, there is a disturbing tendency, particularly among rerollers to seek the intervention of the ministry whenever there are spikes in steel prices. It is, therefore, refreshing to hear Singh say that “Government has no role in fixing steel prices. If the prices are advancing, one reason is that demand has stayed ahead of supply.” At the same time, Singh sends out the message that he will not abdicate his “moral responsibility” to ensure that steel prices remain reasonable, particularly of the long items that people need to build houses.
The metal prices became an issue for jousting between steelmakers and rerollers and other big users at the height of commodity boom in 2008 requiring the government to play the role of arbiter. The tariff barrier being marginal and there is so much extra capacity globally that our steelmakers would think of making extra profits at hints of firming up of demand at their peril. Is it not that our steelmakers live under constant fear of this country being targeted by China and CIS for disposal of surplus metal?
Lately there have been some rise in flat and long steel prices here and abroad. But prices are far from what they were in July 2008 for any user group to look askance at steelmakers. In fact, the recent upward price revision comes after some falls in the final quarter of 2009. SAIL chairman Sushil Roongta said the other day that steel prices should now remain “stable.” But Roongta has put in a caveat that “unless of course there are no significant increases in raw materials prices.”
The country’s leading steelmakers such as SAIL, Tata Steel and JSW made more profits in the third quarter of this financial year than street projections. In spite of soft product prices, they managed to produce impressive results, specially in comparison to the corresponding low base period of 2008-09, helped in a big measure by higher production, belt tightening by improving techno-economic parameters and making a higher percentage of value added steel.
What no doubt has helped steel groups here to post higher prices was our steel production between April and December 2009 falling short of apparent consumption. According to Joint Plant Committee, while the country’s steel production was 44.11 million tonnes in the first nine months of 2009-10, consumption was higher at 45.98 million tonnes. During this period, India imported 5.21 million tonnes of steel, a rise of 16.6 per cent over the last year while exports fell 36.1 per cent to 2.10 million tonnes. Steel being a widely traded commodity, developments in the North American, European and Asian markets will perforce have an impact here. How will not Indian prices rise when the CRU steel price index (CRUspi) was up 6.6 per cent to 159.8 points in January?
Global improvement in steel demand emanating from replenishment of thinning inventories at the user end and the gradual build up of consumer confidence translated into buying of cars and other durable goods have allowed steel producers to pass on the incremental cost of raw materials to stockists and dealers. But the commodity market may come under pressure because of the worryingly high sovereign debts in the Europe and disturbing job scene in the US.
According to Gujarat NRE chairman Arun Jagatramka, in the prevailing uncertain world economic outlook, steel prices in the coming days will be largely predicted upon the soaring cost of iron ore and coking coal. For both, the rising Chinese demand amidst spare capacity in raw materials originating centres should push the prices further north, says Jagatramka. The Indian demand for coke is also growing strongly with China virtually abstaining from exports and supply from Russia tightening gradually as domestic demand strengthens.
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