Abolition Of Steel Freight Equalisation Suggested

The partial abolition of the freight equalisation scheme (FES) on steel prices has failed to induce investments in the steel-using areas, the expert committee studying the impact of the scheme has said in its report.

If the trend continues, the eastern region will witness further de-industrialisation, and even expansion of existing units may prove to be economically unviable, the committee report says.

The Union steel ministry had constituted an expert committee recently under the chairmanship of development commissioner of iron and steel, to study the impact of partial abolition of FES on steel prices.

The committee has recommended a total abolition of freight, particularly in an open marketing pricing regime, adding that it is merely an element of cost for the producers and not an element of price that is to borne by the buyers.

 

Deregulation of prices and the partial withdrawal of freight equalisation in the sector has resulted in an increased share of receipt of both pig-iron and steel in places close to the steel plants, while the supply to distant places is much less as it involves a financial burden on the producers to the extent of the excess of freight over and above the ceiling limit.

Steel producers having integrated steel plants, both in the public and private sector, have said that in the present system of pricing, this element is only an avoidable burden, the report said.

Steel majors like, Steel Authority of India Ltd (SAIL), Tata Iron and Steel Company Ltd (Tisco) and Rashtriya Ispat Nigam Ltd (RINL) have sought total removal of FES, saying that such a measure only mounts financial burden on them.

SAIL has estimated that the company is bearing a burden of about Rs 80 to Rs 90 crore a year on this account itself. Tisco has not made any estimate because of their changed pricing system. The burden on RINL was about Rs 12 crore in 1995-96.

The supply pattern from the integrated steel plants changed remarkably considering the advantage of reaching the material to places near the steel plants on an actual freight basis, while supply to places beyond ceiling distance decreased considerably.

According to a draft report of the committee, between 1991-92 and 1995-96, the dispatches within 1250 km grew by 55 per cent, whereas that for distance beyond grew by a mere nine per cent.

The steel traders also favoured complete removal of FES saying that it would improve their role in the market especially at a time when the industry is facing rough weather due to sluggish demand in the market.

Instead, it has been viewed that main steel producers should increase ex-plant delivery or deliveries from nodal stock yards and leave the further distribution to the traders, the report said.

The committee report said that since there is no distribution control, the main producers are free to sell anywhere and at market-driven prices, but in the presence of FES, they would prefer to sell at a place that ensures maximum profitability. This would make selling close to the plant a more viable option the report said. During the days of regulation, the main steel producers were price setters, however, after liberalisation and deregulation they are no more leaders.

Moreover, the lowering of import duties has resulted in an almost two-fold increase in imports in the last few years. Therefore, not only has the price setter status of the main producers changed, they have also now become price takers, the report said.

This loss of position is an important factor which has been shaped apart from the overall liberalisation with the removal of FES, the report said.