JSW Steel foregoes DEPB sops to counter inflation

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Seshagiri Rao , Director of Finance, JSW Steel , said the company has rolled back prices in February by Rs 500 per tonne. The steel major has voluntarily foregone Duty Entitlement Passbook,  or  DEPB , benefits to counter inflation, he said.

 

According to Rao, domestic steel prices are lower by Rs 200 per tonne compared to international prices. Impact of raw material prices is Rs 12,000-15,000 per tonne for FY08, he said. "Steel industry margins remain squeezed domestically due to higher input costs. If coal prices go up to USD 300 per tonne, cost push could be as high as Rs 8,000 for the steel industry."

 

Excerpts from CNBC-TV18's exclusive interview with Seshagiri Rao:

 

Q: Given the kind of developments we have seen yesterday on the price rollback, give us an idea of the situation from here on in an environment of increasing input costs for companies like yours and the industry as a whole?

A: The steel industry has adopted a very responsive, co-operative, and collaborative approach. We are on the right side of the government because we also share the concerns of high inflation. That is why we have rolled back prices in February 2008 by Rs 500 per tonne. We voluntarily restrained exports of steel products and agreed to make more steel available in the domestic market.

 

We had also voluntarily foregone the DEPB benefit on steel exports. Yesterday, there was a further reduction in prices of Thermo Mechanically Treated, or TMT, bars, and rods. Galvanized corrugated sheets also saw a further reduction of Rs 500-1,000 per tonne. These measures have been agreed in a very challenging environment. Today, the domestic steel prices are lower by Rs 200 per tonne compared to international prices.

 

The second challenge faced today is on raw materials. Prices have gone up to unprecedented levels relative to the past period. Even in that scenario, the industry responded favorably.

 

The National Mineral Development Corporation, or NMDC, had increased prices by 47.5% from October 1, 2007. Internationally, no other mining company has announced an increase in the long-term prices. It is also threatening to increase iron ore prices further from April 1, 2008. Long-term coal prices are expected to be settled almost 150-200% relative to what it was last year. But even in that scenario, the industry favourably responded and took all steps with the concern that inflation has to be under control.

 

But inspite of all that, all stakeholders ‑- government, user industry, investors, or input suppliers like iron ore and coal - are still squeezing the steel industry in the current situation. The impact of raw material cost price from April 1, 2007 to March 31, 2008 is Rs 12,000-15,000 per tonne with an upward bias. The increase in steel prices is mainly on account of unprecedented increase in raw material prices.

 

I wanted to clarify that inflation is not contributed by the steel industry, it is mainly driven by an unprecedented increase in input prices like iron ore and coal. As far as user industry is concerned, the input in raw material costs has not been fully passed on to the consumer. This is the current environment, which is very challenging.

 

Q: Within that environment for a company like yours and the industry as a whole, what kind of shrinkage are we going to see? Why are you not able to pass on the cost, you have to absorb higher inputs in terms of margins and growth?

 

A: In the first nine months of last fiscal, margins in the steel industry were squeezed because of cost-push, but internationally prices are going up only in the first quarter of this calendar year, i.e. from January to March. Going forward, we are at crossroads with iron ore and coal prices going up. In this situation, we are watching what the coal price increase would be. This will be announced in the next few days. Also, how NMDC will react to the price increase for iron ore? Based on that we will take a view going forward.

 

Q: If you had to increase prices and were allowed to in the light of current raw material prices, what theoretically would have been the price increase that you would have had to take to maintain margins at equilibrium or perhaps better than where they are currently?

 

A: Last year, the price cost-push was Rs 12,000-15,000 whereas the increase was only to the extent of Rs 6,000-7,000 per tonne. Similarly, if coal prices go up from USD 96 per tonne to USD 250-300 per tonne from April 1, 2008, and iron ore prices go up further if NMDC revises prices, so the cost-push can be to the extent of Rs 7,000-8,000 per tonne.