Steel: Soaring costs

Integrated players, analysts suggest, are better placed to cope with rising raw material costs.

As a result of rising raw material costs, Indian steel companies have raised prices by Rs 2,000-3,000 a tonne recently. NMDC, for instance, increased domestic iron ore prices by 15 per cent; another 30-50 per cent rise is on the cards.

International prices, too, are being negotiated at about 100 per cent higher rates at $110-120 a tonne. Even the coking coal price for April-June 2010 has been set at $200, significantly higher compared with last year’s benchmark price of $128 a tonne.

Both these will increase the per-tonne cost of making steel by Rs 5,000-5,500. Analysts believe the current rise in steel prices will not contain the rise in raw material prices fully, and as a result, steel prices will head north.

In terms of the market environment, companies are able to pass on the rise due to strong demand led by the global economic recovery. According to World Steel Organisation, steel production was up 27 per cent globally, led by China (25 per cent) and India (20 per cent) in February 2010.

Going ahead, the non-integrated or partially integrated companies could see an impact on margins. SAIL has 100 per cent captive iron ore but procures 30 per cent of its coal requirements from the domestic market. Likewise, JSW Steel depends on imported coal for its entire requirement and only 20 per cent of iron ore is captive.

In such a scenario, analysts say, companies integrated players like Tata Steel and Jindal Steel & Power are better placed given their captive raw material supply. This is also a reason that JSW Steel and SAIL have not moved much in the last one week at the bourses, whereas Tata Steel has surged around 8 per cent.

With contributions from Jitendra Kumar Gupta & Sunaina Vasudev