The Hindu : Steel makers in a bind

Online edition of India's National Newspaper
Sunday, Mar 07, 2004

Business

Business

Steel makers in a bind

By Ramnath Subbu

MUMBAI, MARCH 6 . The China factor in the global steel market has loomed large last year and now with sky-high hot rolled coil (HR) and input prices, the Indian steel sector finds itself in a difficult situation.

"The global steel situation today is nothing but a game of `Chinese Checkers' — first the Chinese bought huge amounts of steel in the market under the pretext of the 2008 Beijing Olympics, then they cornered all the raw materials and controlled prices. They have also banned export of coal — of which they are major suppliers,'' was the lament of a senior executive of a leading steel company.

Last week, under the aegis of the Indian Steel Alliance comprising four leading steel players — the Steel Authority of India, Tata Steel, Essar and Ispat — a reduction of up to Rs. 4,000 a tonne was announced in the price of HR coils and henceforth, it would cost Rs. 27,000 a tonne (ex-stockyard price). Not only does this measure pass on the benefit of the excise duty cut by half to 8 per cent, but it also puts a cap on the prices of HR coils which were zooming. Also, in a bid to augment domestic availability of steel, the Government curtailed the DEPB (duty entitlement pass book) benefits for steel exports and lowered the landed cost of inputs such as coke, coking coal and non-coking coal. Earlier, in the mini-budget announced in January, the Government cut import duty on steel by 5 per cent to 20 per cent and removed the Special Additional Duty (SAD) of 4 per cent. All this points to active government intervention in the industry and this has not gone down too well with the players. "The big question is what the Government is trying to achieve with all these measures. The alternative left for the manufacturers is to take on board the losses as was the case in 2000 or to shut shop,'' said the executive, adding, "At least a part of the subsidy could have been off-set by exports but the DEPB cut has even countered that. At the end of the day, you have to allow the free market to operate.''

J. Mehra, Managing Director, Essar Steel, said, "That exports are the reasons for the shortage is not at all the issue. If exports are unviable, producers will sell in the domestic market — where there are no buyers. The option is to cut capacity and that will again lead to a rise in cost of production.''

The industry's argument is that it is just recovering from a syndrome of high cost debt, lack of growth in domestic consumption and severe pressures on price realisation in the 1999-2002 period. There is no escaping the fact that Indian steel makers are in a bind given spiralling input costs. Coke supplies from China — normally at 13-14 million tonnes — were already down at 7-8 million tonnes and in January-February 2004, it was at a mere 1-1.5 million tonnes. Coke prices have gone up from $200 in end-2003 to $300 in January and are at $480 a tonne now. Freight rates too have moved up from $9 in December 2002 to $28 in September 2003 and are at $45 a tonne now. Metal scrap prices have moved up from $120 a year ago to $370 a tonne. China meets almost 80 per cent of India's appetite for coke and there are no long-term contracts available with China cancelling all contracts for metallurgical coke with India. Steel prices rose from $180 in November 2001 to $350 in February 2003 and are now hovering around $600 a tonne. Mr. Mehra said, "In the last one year, there has been rising demand from China and huge demand for coke and iron ore. Earlier it was a net exporter of both these raw materials. The rise in prices here has nothing to do with cartelisation or making undue profits.''

Steel consumers such as the automotive industry are watching the situation. R. L. Ravichandran, Vice President, business development and marketing, Bajaj Auto, said, "On the basis of the increases announced to date, the impact would be Rs. 300-500 a vehicle depending on the model. Anyway, the steel manufacturers are not passing on the hikes till June so we will wait and watch. We already have long term steel supply contracts till June and have not yet decided whether to pass on the hike to the consumer or not.'' On the other hand, Ravi Kant, Executive Director, Tata Motors, said that if rates were revised further, it would surely impact the company's costs. "A part of it has to be absorbed and a part will be passed on to the consumer,'' he said. Regarding a resolution to the problem, Mr. Mehra said, "We have to take a decision on the iron ore being exported to China. India exports 30 million tonnes of iron ore to China against 16 million tonnes two years ago. What needs to be worked out is a sort of barter system of coke and coal for iron ore with them. We should also re-start the supplies of the same from Australia which was the regular supplier earlier.''

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