Sliding rupee hits metal scrap import

Secondary producers find margins squeezed, being unable to pass on higher costs to consumers

Secondary metal producers operating on imported scrap have halted booking the raw material afresh, as the drastic depreciation in the rupee has made these costlier.

A report by JP Morgan estimates India’s metal scrap import at $13 billion (Rs 7,800 crore) for 2012-13, almost double the $7 bn in 2009-10. The steep decline in iron ore availability due to restrictions in Karnataka, Goa and Odisha have escalated import of steel scrap, the alternative raw material.

Importers have abstained from fresh purchases, concerned that the falling rupee would add to raw material costs and squeeze margins due to their inability to pass it on to consumers. Metal demand has come under tremendous pressure from consuming industries, including automobiles, infrastructure and construction. Margins are likely to be squeezed between high cost of raw material and poor demand for finished products.

“We have halted our fresh orders and adopted a wait and watch strategy at the rupee’s current level of 60 against the dollar. At this level, import of steel scrap will be costly. Since steel demand has been under severe stress from consuming industries, it is challenging to pass on the increased raw material cost to consumers,” said Neeral Singhal, managing director of Bhushan Steel, which uses imported steel scrap as raw material in its furnaces extensively.

The rupee has depreciated around 10 per cent so far this year to trade at 60.19 against the dollar today. This means import of steel scrap has become proportionately costlier. While prices of steel scrap have declined 16 per cent to $334.5 a tonne (ex-Rotterdam), the levy of 2.5 per cent import duty offsets the price advantage for Indian users.

“We are waiting for the rupee to appreciate for passing on fresh orders. On reaching 58 against the dollar, we would start fresh orders. At the current level of 59 and 60, import of steel scrap is uneconomical,” said Singhal.

In addition to steel scrap, India imports a huge quantity of aluminium, copper and zinc scrap for manufacturing secondary metals for use in subsidiary activities, including manufacturing of artifacts and some household items. Barring a few leading primary metal producers, others use seconds (damaged virgin metal) and scrap as raw materials. Companies like Jhagadia Copper use scrap as raw material immensely.

“Those who did not hedge the risk in both metal and currency equally would be hit badly due to the depreciation in the Indian currency. It is a fluctuating phenomenon. High cost of raw material would keep companies’ margins under pressure,” said Pukhraj Sethiya, consultant (mining), PricewaterhouseCoopers.

A fall in import of metal scrap is set to result in a loss of Rs 11,000 crore in foundry exports to competing countries, including China and Taiwan.

“It is the most challenging of times, which Indian steel and secondary metal producers did not see even in the global economic slowdown era of 2009. In fact, steel mills have cut their production capacity due to high cost of scrap imports and their failure to pass it on to consumers,” said Zain Nathani, vice-president, Metal Recycling Association of India.

The sentiment can be changed only through government support, he added.