Steel industry reeling under high input costs

Shubhashish / Mumbai Nov 07, 2012,
Business Standard
For the steel industry, the near term looks uncertain. Though prices of raw materials such as iron ore and coking coal are rising, demand from the automobile, construction and capital goods sectors remains low.

Through the last quarter, steel and raw material prices fell, owing to the crunch in global demand. However, now, coking coal and iron ore prices are on the rise again and steel companies have to take a hit on their margins till raw material prices moderate or demand improves. Then, they would have the room to pass on the high input costs to customers.

A JSW Steel spokesperson said, “Iron ore prices have risen about Rs 400 a tonne compared to FY12 levels.” In the international markets, prices of iron ore and coking coal have risen about 13 per cent from October, while steel demand hasn't increased. JSW Steel, which posted a net profit of Rs 691 crore in the quarter ended September, recently said, “While domestic steel demand is expected to be steady, rising imports and the unavailability of mineral resources would be major deterrents.”

Though companies with raw material inventory are in a better position, their inventories wouldn’t last for more than one or two months. Nomura's Alok Kumar Nemani and Indrajit Yadav said, “Half the coking coal contracts are still on a quarterly basis and, therefore, the lag remains high for some companies that keep an inventory of 45-60 days. This means the current year would, more or less, pass with low raw material rates.”

In India, steelmakers had to follow their global peers and cut steel prices by up to Rs 3,000 a tonne, or four to five per cent. However, demand is waning. In the quarter ended September, the Indian steel industry saw demand rise only 2.8 per cent, against 7.7 per cent in the previous quarter.

An analyst tracking the sector said, “That there hasn't been an improvement in demand is not a good sign. We hope the reform announcements, coupled with infrastructure projects, revive steel demand in India.”

On passing on the increasing burden of input costs by increasing prices, the representatives of two leading steel makers said their strategy was to “wait and watch”. One of them, representing a leading south India-based steel firm, said, “They can increase prices only if demand improves. But in the absence of that, they may have to take hit on the margins.”

According to Capitaline, soft demand from the automobile and construction sectors, along with the rising local iron ore and met coke prices and the rupee depreciation, were exerting pressure on steel margins.

The steel industry in India needs about 118 million tonnes of iron ore a year.