Steel not to catch cold in the new year

MARKET OUTLOOK

Steel is likely to remain the hottest commodity in 2008 with prices set to remain firm throughout the year. An uprecedented rise in raw material prices, including iron ore, coal, ferro alloys, is expected to keep the alloy dear.

Most importantly, demand is expected to strengthen substantially, despite higher prices, as infrastructure development activity speeds up ahead of the Olympic Games 2008 in China and Commonwealth Games 2010 in India.

Experts, however, are divided on the extent of the surge due to economic, geopolitical and demand factors. In an interview with a private TV channel, J Mehra of Essar Steel Holdings and Seshagiri Rao of JSW Steel projected the price to go up by 15-20 per cent next year, while Nitin Johari, CFO, Bhushan Steel, expects prices to go up by 10 per cent.

Mehra and Rao said that the current spurt in raw material prices should be passed on to consumers and, therefore, a 15-20 per cent rise can be foreseen. But an estimated slowdown in demand in the second half may bring down the extent of rise in the first half, feels Johari.

S K Gupta, director, Jindal Steel, too, is circumspect on the extent of the rise in 2008. "The demand from China, which controls 35 per cent of world production, will continue till the Olympic games," says Gupta. Although the slowdown in demand is not very likely, raw material prices may not reflect on the alloy. The US economy has shown signs of recovery and, therefore, demand from the country is likely to renew.

Steel producers, who have enjoyed good margins in the last two-three years, are expected to fell the squeeze in 2008 with mounting input costs.

However, growing demand, led by the domestic infrastructure boom, is projected to be met through brownfield and greenfield expansions and imports. Year 2008 is set to witness total capacity expansion of four-five million tonnes to prop up total annual production to 51 million tonnes. In the international market, steel prices are quoted in the range of $640-650 a tonne, which are likely to hit $700 in 2008. But this level will be unsustainable.

"Steel prices will slip to the present level immediately after hitting the psychological barrier," says Johari. "Rupee appeciation may create an imbalance between domestic product and import prices," he added.

Meanwhile, iron ore prices, which have nearly trebled in the last four-five years, will jump by 35-40 per cent in 2008. At present, long-term contracts for iron ore is being signed at $140-150 a tonne.

India is likely to remain a net importer of all kinds of steel, including crude steel and specialised steel, in the next few years as industry will meet its commitments abroad.

Of late, the Indian steel industry has started importing cold-rolled steel. "Cheap imports are likely to plague the domestic industry if the current import duty of of 5 per cent is not raised to at least 15 per cent," said Johari.

Presently, companies pay 5 per cent import duty on hot-rolled and cold-rolled steel.