Freight Hike Tohit Steel Sectorprofitability

The 12 per cent hike in rail freight is expected to have an adverse affect on the steel industry.

The main producers like Tata Steel and Steel Authority of India Ltd (SAIL) said the hike in freight charges, which will come into effect from April 1 this year, will affect the profitability of companies in fiscal 1997-98.

The main producers have pointed out that they have little option but to pass on the additional costs to consumers.

SAIL chairman Arvind Pande said the 12 per cent hike will have an impact of Rs 180 crore on incoming traffic, which includes raw materials like coal and iron ore, while the effect on outgoing traffic, consisting of finished products, will be as high as Rs 70 crore.

 

The total impact will, thus, be around Rs 250 crore and this will affect profitability in the next fiscal.

The freight increase comes close on the heels of a Rs 350 crore increase in production costs due to higher coal prices and the hike in power tariffs and petroleum prices. SAIL will definitely find it more diificult to absorb the additional costs. We will have to pass on a portion of this additional cost to the consumer, besides trying to absorb a part of it, Pande said.

If demand conditions in the steel sector do not improve, our profitability will be affected in the coming year.

We will take a decison on increasing prices only after the Union budget proposals when we will be in a better position to work out the total impact, he added.

A reduction in customs duties on HR and CR coils in the last budget has flooded the market with cheap imports of HR coils.

The situation has been worsened by the sluggish demand for steel caused by stagnant growth in the infrastructure sector.

SAIL, the countrys largest steel producer, did not exercise its option to raise prices in January, mainly due to poor demand conditions which have led to a pile up of over 1 million tonnes of unsold material.

According to the Steel Furnace Association of India (SFAI), the 12 per cent hike in freight charges for steel will lead to an increase in road freight too.

Unlike the main steel plants, mini steel producers depend more on road than on railways for movement of material.

Hence, mini steel producers will be affected by the second round of reactions to the railway freight hike.

SFAI executive director Unninayar said, the steel industry has been facing a tremendous squeeze on its profitability during the last one year.

On the one hand, the government has reduced customs duties on steel imports while on the other hand, there has been a steep increase in various input prices like power tariffs, which are exogenous factors over which the industry has no control.