The Hindu : User industries in a quandary

Online edition of India's National Newspaper
Monday, Mar 22, 2004

Business

Business

User industries in a quandary

Steel users are discovering that sourcing steel from the global marketplace is well nigh impossible in the current context despite duty reduction, says K. T. Jagannathan

WITH THE demand outstripping supply and prices escalating Indian steel producers are reportedly reluctant to enter into contractual commitments with buyers, putting user industries in a tight spot.

In the few cases where contracts are entertained — thanks to long-standing relationships with buyers — steel companies are understood to have drastically slashed their tenure. So much so, rates have sort of tended to coincide with spot prices. If steel users have found the domestic suppliers cashing in on an advantageous environment and playing tough, they are now discovering that sourcing steel from the global marketplace is well nigh impossible in the current context despite duty reduction. The cut in export incentives in order to discourage exports and augment the recent domestic supplies does not seem to have helped.

Highly placed sources in user industries told this correspondent that the current demand-supply mismatch had triggered quite an uncertainty on steel availability. "Even if we are prepared to pay high, the availability is bad,'' said K.V. Rangaswami, Executive Vice-President and Head of Operations, Engineering Construction and Contracts Division of Larsen & Toubro Ltd.

The current boom, sources said, had emboldened the industry to jack up prices at the time of delivery even where contracts were entertained. "We are in more of a seller market,'' said K. Venkataraman, Executive Vice-President and Head of Resources and Supply Chain Management of the ECC Division of L&T.

While the user units have come under enormous pressure due to escalating steel prices in the past 15 months or so, the steel companies are laughing all their way to the banks. Capacity utilisation by both public sector and private sector units has gone up significantly. "The domestic steel industry has never seen it so good. This increase has indeed helped to revive it,'' said some industry sources, who declined to be quoted.

According to a top official of a rated auto component unit of a major group, steel prices on the average had gone up around Rs.8000 a tonne (after taking into account the recent reduction) in the past couple of years. This worked out to a total additional realisation of Rs. 24,000 crores on a capacity of 30 million tonnes. "This is about one per cent of the gross domestic product (GDP) of the country,'' he said.

"No doubt the domestic players are facing a supply constraint. To compound their problems, they have to contend with insufficient availability of critical raw materials like iron ore and metallurgical coke,'' sources said. Factors like higher freight and mounting global demand had sent the price of metallurgical coke up by over 100 per cent, they pointed out.

According to Indian Steel Alliance (ISA), the input cost for the industry has gone up by over 300 per cent in the past few months. The global price of coke is up over 280 per cent from $120 a tonne in December 2002 to $465 in February 2004. Iron ore price has escalated from $28 a tonne in December 2002 to $120 a tonne. Freight charges have soared by over 400 per cent.

Consequently, steel prices have shown considerable firmness. In the past few months alone, there has been an increase of 50-60 per cent in long products (like channels, beams and rebars). In the case of flat products (like MS plates, sheets and coils), the price increase is well over 100 per cent.

Assorted factors — both from within and without — have contributed to the firmness in steel prices. The growth in the automobile sector, the huge government spending on infrastructure, easy money-led demand for housing and the like have all triggered an unseen level of demand for steel. On the other hand, world-over capacities have shrunk following closure of units in countries like the U.S., E.U. and Japan. To compound the woes, the Chinese have turned a big buyer of steel. China, it is believed, has imported 50 million tonnes of steel in the past 12 months are so. (This is reportedly linked to its preparation for the 2008 Olympics). ``In this situation, leading export mills in Japan, Korea, E.U. and Brazil are not willing to look at contracts,'' sources said.

"I see the steel price hike contributing to an increase in the rate of inflation in the country,'' said A. Vellayan, Director (Marketing) of the Murugappa Corporate Board. The steel content in common building construction ranges from 15-20 per cent. This could be as high as 50 per cent in the case of water supply projects. "The impact of steel price hike even in the most common construction is of the order of 10 per cent,'' said Mr. Rangaswami.

According to Mr. Vellayan, the steel price hike had effectively increased the cost of a bicycle by Rs.100. "Bicycle is a product that caters to the lower income group and it is extremely difficult to pass on the cost increase in one go,'' he pointed out. Makers of consumer products like bicycles with a high steel content are facing a problem another kind. "At the customer end, we have to permit prices on a yearly or six-monthly basis. On the supply side, however, prices are changing on a monthly basis,'' rued Mr. Vellayan.

The current steel scene, nonetheless, is expected to set in motion a series of actions on the ground. Aggressive negotiations with component suppliers, a serious peep into existing cost structures, co-operative competition on the price front and re-formulation of contracts are among the possibilities industry watchers are presaging in the wake of mounting steel prices.

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