Steel prices likely to rise 5% next month

Post-monsoon revival will be joined by supply contraints, surging demand.

Steel prices are likely to rise by five per cent, or Rs 1,000 to Rs 1,500 a tonne early next month on a rebound in post-monsoon demand from the construction and automobile sectors. Globally, too, steel industry fortunes are reviving and prices are firming up.

Last month, China removed a rebate on steel exports. This led to firming up of prices as supplies from there fell.

Barring 2008, when the world was struggling to cope with the economic crisis, average steel prices rose by 2.53 per cent in September between 2006 and 2009. The year 2008 saw a huge correction following the slowdown, but a pick-up was seen from early 2009. The end of the monsoon season would boost demand from the construction sector, which consumes 45-50 per cent of steel longs out of India’s total consumption of around 60 million tonnes (mt).

Following rising raw material costs and freight rates, steel prices have been moving up. Now, constraints in supply would add to the effect, said the latest report by the Mumbai-based research firm, Anand Rathi. We believe the seasonal factor plays a major role in the pricing of steel, the report added.

Generally, construction activities during the three-month monsoon period remain low, which add to pressure on prices. But, with the offset of the monsoon period, work on construction projects starts, which raises long steel demand.

Consumption of steel longs in India in the April-June quarter rose much faster than production. During the quarter, steel consumption rose sharply to 14.9 mt, as against 13.3 mt in the corresponding quarter of the previous year, in comparison with production of 13.3 mt versus 12.9 mt. Though production rose over last year, it still could not match requirements.

This led to a surge in imports of finished steel, especially in hot rolled coils, said Anil Suraj, a producer based in Mandi Gobindgarh, India’s largest steel-sale market yard.

Raw material supply has become a constraint due to the Karnataka government’s ban on ore exports, which has already pushed steel prices up by Rs 500 in the past fortnight. Since it is set to continue, there will be another round of price rises, Suraj added.

Following rising raw material costs and freight rates, steel prices have been moving up; now, constraints in supply would add to the effect. Iron ore in India now trades at $155-160 per tonne, a steep rise from last month’s low of $125 per tonne. Production costs for secondary producers are rising because of supply constraints in sponge iron. The steel industry has little choice but to pass on to users the higher costs of raw materials and is seeking to raise steel prices. The seasonal factor plays a major role in the pricing.

With the recent round of price rise, TMT bars are selling at Rs 32,100 per tonne in Mandi Gobindgarh.

On the NCDEX, steel has been hovering between Rs 24,200 and 24,300 a tonne after last month’s rally. A further rise in steel long contracts is expected, with an upside potential between Rs 25,000-25,200 per tonne.

Demand for steel would continue to rise, since the Union Budget 2010-11 proposed investment of Rs 1.73 trillion on infrastructure. Steel production in 2010-11 is likely to be 65 million tonnes, with consumption expected to grow by over 10 per cent in the next five years, driven by the construction, real estate and infrastructure sectors.

At present, primary manufacturers are running at full throttle, indicating that demand outdistances consumption. Capacity expansion plans of primary manufacturers are in the pipeline and output would start to hit the market only after the third quarter of 2011.