India's wholesale price index, released weekly, hit 7% for the year up to 22 March, the highest since December 2004. The sharp spring up in index for minerals and basic metals is beginning to show its impact on overall Inflation, and it has risen by 38% compared to previous week alone. Industry experts insist that rising steel prices are triggered by rising input cost like scrap, iron ore and coking coal. The main area of concern is iron ore where the country is currently in surplus yet prices are touching the roof with escalation of over 100% during the entire fiscal 2007-08.
The current international pricing scenario demands a prices increase domestically The rising raw material costs and other available inputs, limited capex resources have driven the steel prices. The government has been taking steps to control prices by increasing the export duties on some commodities and even banning exports on some.
The commerce ministry is of the view that any reduction in steel export duties will not help unless steel producers reduce the base price, on which the excise duty is calculated. Although the finance minister, in the Budget, lowered excise duty on steel inputs from 16% to 14%, there has not been any reduction in prices. Instead prices have gone up.
The commerce ministry is proposing that the government to come out with a price stabilization scheme and continues it till domestic prices are at par with that of China. After a high profile meeting between the Steel Secretary and top steel producers on Thursday, industry has agreed to roll back prices across important steel categories.
- Tata Steel, SAIL and Ispat have cut prices of Long product by Rs2000/tonne.
- RINL, Essar Steel, SAIL and Tata Steel have also agreed to cut prices of galvanised steel by Rs500-1000/tonne.
- Steel Makers have put forward a demand that the excise duty on input commodities of steel to be brought down from 14% to 0%.
- Steel producers have not committed to any price cuts in prices of other flat products (HR coils, HR plates, CR and CRCA).
- The government has proposed a Rs400/tonne subsidy for transportation of steel.
Government Intervention in controlling prices to curb inflation is not a good sign for steel Industry. Companies having their own captive mines for coaking Coal and Iron ore will be best placed in rising raw material situation.
Positive for Company - Tata Steel and SAIL
In its domestic operations, Tata Steel has 100% self-sufficiency in iron ore and 70% in coking coal. If Cut in Long Product prices is maintained throughout the year, it will reduce the Tata Steel’s consolidated EPS by 2.2%. Galvanised steel accounts for 4% of Tata Steel’s collective domestic volumes, so price cut wont effect much on earnings. Flat product account for 65% of Net Revenues for Tata Steel, and there is no change in price structure in this Category. This implies its domestic operations will see a minimal impact on company earnings. Tata Steel also have higher exposure to the international markets, where prices are on upswing, so will be least affected. SAIL is also well placed as it is having own captive mines for coking coal and Iron Ore.
Negative for Company – Jindal Steel & Power and JSW Steel
Jindal Steel & Power and JSW Steel are expected to be worst affected by the industry’s decision to roll back prices of steel products. That’s because long products are believed to have contributed nearly 10 - 11 per cent of JSW’s net turnover of Rs 7,230 crore in the first nine months of FY 08. Besides, about 18 per cent came from galvanised products. For Jindal Steel & Power, nearly 46 - 48 per cent of its net sales of steel, is understood to have been contributed by long products.
Ahmedabad Time