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Riding A Price Spiral
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Indian steel companies, which are heavily dependent on foreign coal, are wary. "Of the 24.4 million tonne (MT) coking coal imported last year, 20.8 MT was from Australia," says Sanjay Jain, senior vice-president, Motilal Oswal Securities. At least 60 per cent of India's coking coal demand is met through imports. Experts predict coal prices would go up 20 per cent and the effects of the supply squeeze will be felt through this year and 2012.
Spot prices of coal have jumped 10 per cent to $256 a tonne over the past month. Since steel makers tie up coal supply through quarterly contracts, the rise in spot prices may not have an immediate impact. But industry watchers say the contract prices could rise up to $300 a tonne for the June quarter compared with the $225 for the three months ending March. This may raise the average raw material cost of local steel makers from 45 per cent to 48-50 per cent of net sales, says a Mumbai-based analyst.
Short On Supply
Along with the rising coal prices, iron ore, another key raw material, also became expensive in line with the rising demand. State-run NMDC has raised iron ore prices by 5.22 per cent. The ore price has gone above $150 a tonne from last year's $130. "The rise in raw material prices against net sales essentially squeezes the margin of the steel makers," says a Tata group executive. The spot iron ore prices towered to their highest ever at more than $200 a tonne in March 2008 during the commodities boom, but it fell later that year after the financial crisis.
But there are some who think the rising prices of steel are not entirely due to input costs. Ankit Miglani, deputy managing director of Uttam Galva Steels, says supply-demand mismatch is the real reason. "Global demand for steel is in upswing. Construction, automobile and consumer goods sectors are witnessing faster growth. But the steel supply is not stable because of idle capacities in the developed world. The shortage in coking coal is restricting capacities to come on stream," he says.
Miglani expects the prices would remain firm till the middle of this year. His company is looking to increase the prices of its products next month. Other players such as Kalyani Steel and Bhushan Steel are also looking at a price hike.
High raw material prices forced public sector steel maker Steel Authority of India (SAIL) to increase the prices from this year. It hiked prices by Rs 1,000 per tonne on flat steel (used in white goods and auto) and Rs 1,200 per tonne on long steel (used in infrastructure and construction). SAIL had slashed prices by about Rs 700 a tonne in November 2010 with the softening of global demand and appreciation of the Indian rupee against the dollar.
JSW Steel, too, increased price by 3-5 per cent in January. It might raise prices further depending on the supply-demand equation in the next two months. "The upswing in coke and iron ore prices has forced us to raise the steel price," says Jayant Acharya, director of sales and marketing at JSW Steel. The company plans to import about 40 per cent more coking coal from Australia and the US in the next financial year as it raises production at its Vijayanagar factory in Karnataka by 47 per cent to 10 million tonne.
Tata Steel, which sources 60 per cent of its coal and entire iron ore from captive mines, has not increased prices. Some analysts say the rise in raw material prices is in fact a blessing in disguise for companies with captive mines.
Essar Steel has increased steel prices by 5 per cent. Vikram Amin, executive director of sales and marketing at Essar Steel, says, "In steel industry, raw material cost constitute approximately 60-70 per cent of the cost of production. The raw material costs have gone up by over 7 per cent over the last quarter leaving no option for steel companies but to increase prices."
The heat of rising steel prices is being felt on the home front, too. Over the past two weeks, prices of consumer durables such as washing machines, refrigerators and air-conditioners shot up by 5-8 per cent. Godrej Appliances and Samsung India have already raised prices. A 230-litre Godrej frost-free refrigerator now costs Rs 15,210, a Rs 600 increase from two weeks ago, while a 300-litre refrigerator costs Rs 800 more. Samsung has made its refrigerators and washing machines costlier by 2-3 per cent and air-conditioners by 10 per cent.
However, Videocon chairman Venugopal Dhoot says the marginal rise in steel prices may not have much impact on the Rs 35,000-crore consumer goods industry, which clocked a growth of 13 per cent in 2010.
The automobile sector, too, has been impacted by the rising steel prices. Arun Malhotra, senior vice-president at Mahindra and Mahindra, says steel and rubber prices put pressure on vehicle prices. "In line with the rising input costs, we need to raise the price of vehicles," he says. For M&M, the rise would be in the range of 0.5-1.5 per cent.
Volkswagen and Tata Motors have raised prices of their products and Maruti Suzuki and Hyundai are expected to follow suit. Acharya says the steel demand is impressive, at an annual growth of 10 per cent. "We expect improvements in infrastructure that will support the steel demand," he adds.
If steel prices continue to rise, the government will find it tough to tame inflation.
(This story was published in Businessworld Issue Dated 17-01-2011)