Steel cos must look beyond themselves
The Economic Times, April 16, 2009, Page 13
COS SHOULD NOT HIKE PRICES AS THE BUSINESS IS LUCRATIVE ENOUGH, THANKS TO THE FALL IN INPUT PRICES
KG NARENDRANATH
WITH INPUT PRICES CRASHING, INDIA’S steel industry is looking up. It can now sell goods at reasonable prices to pep up pent-up demand for the metal and engender significant economy-wide revitalisation of consumption. What is important, however, is that the primary steelmakers would need to respect the sentiments of not only the consumers but also the mineral industry, their raw material suppliers, for them to sustain the situation.
True, ‘global steel prices’ or the average export prices of the metal have plunged headlong since June last year owing to the economic crisis that followed the financial meltdown in the west. Hotrolled coil is now being exported by major steelproducing countries at $450/tonne as compared to $1,100 a year ago. A corresponding fall, of up to 50%, has also been there of the global prices of coking coal, iron ore, steel melting scrap and ferro alloys. The decline in prices of these inputs has been sharper, to the benefit of the steel mills. For example, the spot global price of coking coal has declined from the peak of $400 to $130, that of iron ore from $140 to $60 and steel scrap from $650 to $270. For the new long-term contracts, steel mills are now demanding further reductionsin prices of inputs, up to 60% from June last year level.
Hard bargaining is taking place between the steel mills in China, Japan and Europe and raw material suppliers in Australia, South Africa and Brazil. The steel giants need to realise that putting too much pressure on the mineral companies at this juncture when there is an all-pervasive demand crunch is not a wise proposition. Such narrow-minded pursuit of partisan interests can’t produce wholesome results.
As SC Mathur, a functionary of downstream steel mills’ association in India says, “with the projected growth in steel demand in the BRIC countries, production cuts by the European and Japanese mills and themassive stimulus packagesbyvariouscountries and the G-20, additional demand for steel would be generated in the months to come and this would help the prices to stabilise at the current levels.” Going by the spurt in sales by Indian steelmakers like SAIL and Tata Steel in the last two months, it is expected that the growth in domestic steel demand and production this fiscal could be much higher than the 1-2% last year. And the likely stabilisation of prices at relatively lower levels would reduce the cost of infrastructure building in India, a very beneficial development as it coincides with the possible investment binge in the sector.
According to India’s National Steel Policy, steel production in the country would grow 7.3% annually till 2020, and consumption, at a rate of 6.9%. High profile foreign investments in India’s steel sector could get delayed because of the global economic crisis. So, it appears the prospect of production growth edging out consumption growth, and making India a net exporter of steel in the next three-four years is rather blighted, although that was what the policy looked at.
The point is that there is an urgent need to rev up steel consumption in India that could lower the cost of construction and infrastructure projects, apart from reducing the prices of a variety of goods ranging from automobiles and white goods to tin plates and utensils. While there could be different views on the degree of price-elasticity of demand, it is undeniable that low prices do revive pent-up demand of steel. The steel companies are now in a position not to hike prices as their business is lucrative enough at the current levels of pricing, thanks to the fall in input prices. An attempt by the steel companies to narrow-mindedly and short-sightedly shore up their own profits at the expense of the economy at large would boomerang on them. If steel prices are low, infrastructure industries and various other users of the material would gain in terms of input costs, and that would drive up demand for their products.
It is also important that the steel companies don’t lobby hard for restrictions on import of primary and semi-finished steel items. A plan to place HR coil on the list of restricted items of import has been put on the backburner by the government, despite strident demand from big steel companies. That was a right decision. A host of applications for imposition of anti-dumping duties on steel items is being considered by the authority concerned. The authority would do well to heed the fact that Indian steel mills, most of which have the advantage of captive raw material linkages, don’t need an extra layer of protection in the form of dumping duties from imports that are genuine competition. There is already an import duty of 5%, ocean freight ($50/tonne) and incidental charges related to imports ($85/tonne) to provide reasonable protection to Indian steel companies.
The Economic Times, April 16, 2009, Page 13
COS SHOULD NOT HIKE PRICES AS THE BUSINESS IS LUCRATIVE ENOUGH, THANKS TO THE FALL IN INPUT PRICES
KG NARENDRANATH
WITH INPUT PRICES CRASHING, INDIA’S steel industry is looking up. It can now sell goods at reasonable prices to pep up pent-up demand for the metal and engender significant economy-wide revitalisation of consumption. What is important, however, is that the primary steelmakers would need to respect the sentiments of not only the consumers but also the mineral industry, their raw material suppliers, for them to sustain the situation.
True, ‘global steel prices’ or the average export prices of the metal have plunged headlong since June last year owing to the economic crisis that followed the financial meltdown in the west. Hotrolled coil is now being exported by major steelproducing countries at $450/tonne as compared to $1,100 a year ago. A corresponding fall, of up to 50%, has also been there of the global prices of coking coal, iron ore, steel melting scrap and ferro alloys. The decline in prices of these inputs has been sharper, to the benefit of the steel mills. For example, the spot global price of coking coal has declined from the peak of $400 to $130, that of iron ore from $140 to $60 and steel scrap from $650 to $270. For the new long-term contracts, steel mills are now demanding further reductionsin prices of inputs, up to 60% from June last year level.
Hard bargaining is taking place between the steel mills in China, Japan and Europe and raw material suppliers in Australia, South Africa and Brazil. The steel giants need to realise that putting too much pressure on the mineral companies at this juncture when there is an all-pervasive demand crunch is not a wise proposition. Such narrow-minded pursuit of partisan interests can’t produce wholesome results.
As SC Mathur, a functionary of downstream steel mills’ association in India says, “with the projected growth in steel demand in the BRIC countries, production cuts by the European and Japanese mills and themassive stimulus packagesbyvariouscountries and the G-20, additional demand for steel would be generated in the months to come and this would help the prices to stabilise at the current levels.” Going by the spurt in sales by Indian steelmakers like SAIL and Tata Steel in the last two months, it is expected that the growth in domestic steel demand and production this fiscal could be much higher than the 1-2% last year. And the likely stabilisation of prices at relatively lower levels would reduce the cost of infrastructure building in India, a very beneficial development as it coincides with the possible investment binge in the sector.
According to India’s National Steel Policy, steel production in the country would grow 7.3% annually till 2020, and consumption, at a rate of 6.9%. High profile foreign investments in India’s steel sector could get delayed because of the global economic crisis. So, it appears the prospect of production growth edging out consumption growth, and making India a net exporter of steel in the next three-four years is rather blighted, although that was what the policy looked at.
The point is that there is an urgent need to rev up steel consumption in India that could lower the cost of construction and infrastructure projects, apart from reducing the prices of a variety of goods ranging from automobiles and white goods to tin plates and utensils. While there could be different views on the degree of price-elasticity of demand, it is undeniable that low prices do revive pent-up demand of steel. The steel companies are now in a position not to hike prices as their business is lucrative enough at the current levels of pricing, thanks to the fall in input prices. An attempt by the steel companies to narrow-mindedly and short-sightedly shore up their own profits at the expense of the economy at large would boomerang on them. If steel prices are low, infrastructure industries and various other users of the material would gain in terms of input costs, and that would drive up demand for their products.
It is also important that the steel companies don’t lobby hard for restrictions on import of primary and semi-finished steel items. A plan to place HR coil on the list of restricted items of import has been put on the backburner by the government, despite strident demand from big steel companies. That was a right decision. A host of applications for imposition of anti-dumping duties on steel items is being considered by the authority concerned. The authority would do well to heed the fact that Indian steel mills, most of which have the advantage of captive raw material linkages, don’t need an extra layer of protection in the form of dumping duties from imports that are genuine competition. There is already an import duty of 5%, ocean freight ($50/tonne) and incidental charges related to imports ($85/tonne) to provide reasonable protection to Indian steel companies.
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