The steel market may not be in the best of conditions, but prices are set to increase, on the back of expensive input materials, led by depreciation of the rupee. Coking coal and iron ore prices have declined three-five per cent in the international market in a month, while rupee has fallen 10 per cent against the dollar. This resulted in an increase in import cost of input materials, forcing steel companies to pass on the burden to consumers.
Coking coal, hovering around $300 a tonne for most of this year, is set for a major correction, with some of the mining majors settling contract prices at $285 a tonne. Anglo American, among the top five coking coal suppliers, has entered into a contract with Korean buyers at $285 a tonne.
Iron ore, too, is on a downward trend. Import prices have fallen to around $180 a tonne, down by 4.8 per cent since the beginning of the month. Moreover, reports coming in from China are pointing towards high inventory levels.
But that is hardly a consideration for domestic steel companies. Prices of flat steel, primarily used in automobile and white goods sectors, have increased by Rs 1,500 a tonne.
“Another round of increase is likely from November. It could be around Rs 500 a tonne,” said Bhushan Steel Managing Director Neeraj Singal. “The fall in raw material prices has not been able to offset the impact of rupee depreciation,” explained another industry representative.
At present, the gap between landed imports and domestic hot rolled coil (HRC), taken as the benchmark for flat steel products, is around Rs 2,500 a tonne. The HRC price in India is ruling at Rs 33,000 a tonne.
“This increase is entirely cost-push-driven. Producers are not going to let go of an opportunity to increase prices. But there is likely to be a margin squeeze,” a downstream Mumbai-based steel producer said. Though the demand in India is steady, the international market scenario is not good, and the industry is not expecting the crisis to be resolved in one year, which puts finished product prices in question.
Domestic steel demand is expected to be moderate over the next five years. In 2011-12, Crisil Research expects profitability to be impacted by rising input costs. Steel prices would increase on the back of input cost, but profitability is likely to decline across the steel industry.
