Supply constraints major concern for steel cos: Experts

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After a high profile meeting between the Steel Secretary and top steel producers on Thursday, industry has agreed to roll back prices across important steel categories.  SAIL and Tata Steel have agreed to cut prices of long products by about Rs 2000 per tonne. Producers like RINL , Essar Steel , SAIL and Tata Steel have also agreed to cut prices of galvanised steel, something which is commonly consumed at the retail level, by Rs 500 to 1000 Rs per tonne.

Speaking to CNBC-TV18, J Mehra, Essar Steel, Rahul Jain of ICICI Securities and Seshagiri Rao, JSW Steel spelt out the concerns that the steel industry is facing. The rising raw material costs and other available inputs, limited capex resources  and high excise duties have been major industry constraints, they said.

J. Mehra , Director of Essar Group & CEO of Essar Steel Holdings feels that the current cost-push is high and steel companies can absorb only a limited cost-push.  He said that all major steel producers have agreed to bring their prices at par with SAIL . Mehra argued that inflation is also affecting the steel producers and they have been suffering from various spiral increases in prices of their major inputs.

Mehra said that the steel price relief is being given only to the retail and construction industry. He added that steel's contribution to inflation is only marginal; at around 3.5%. The price differential between the domestic and international prices is at USD 150-200/tonne, Mehra informed.  He said that the Q4 results of majority steel companies would show a drop in earnings. 

Rahul Jain of ICICI Securities feels that the impact of the roll back to steel companies would be limited. TMT bars and galvanised steel are not a large segment for companies, he added. He feels that there is not much risk for earnings at this point and one needs to wait and watch, he feels. The real issues to be addressed are on the supply side, Jain feels.

 

According to Jain, India is an exciting market for steel investors. He is confident that the companies with captive sources will show robust earnings growth. The current international pricing scenario demands a prices increase domestically, he feels. He believes that the government should consider the large capex plans of companies, before asking a rollback.

 

Both Mehra and Jain on the same fact that instead of looking at the problem of steel pricing at the moment, the entire focus should shift to the supply side.

 

"In the last few years except for the people who have the manufacturing base in India, who have been expanding brownfield expansion, there is no greenfield expansion that has taken place. So far, it's a matter of serious concern. One should look into it of why we have not been able to proceed on the greenfield and they should facilitate the green field expansion, which is linked with getting the land, getting the iron ore, getting coal, getting gas. So unless all these supply side constraints are taken care off, we have only now started the pinch of it. Going forward, if the steel consumption demand grows at the rate of 12%; in India you need 6 million tonnes every year as the additional requirement of steel - where is it going to come from."

 

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 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."

 

Mehra elaborated the steel industry's arrangement with the government.

 

"Basically the attempt has been to give a relief as much as the steel producers can to consumers who are retail consumers; on the lower income group kind of consumers. So the construction comes under control - the entire issue was only on that. There are three major supplies; but there are large numbers of fragmented producers of rebar which are not a part of these major producers who have agreed to cut it down," he said.

 

Mehra added, "So the major producers who are a disciplined lot they have said - we will bring the prices at par with SAIL. But whether it would have an impact on the consumers at large, I am not quite sure because there are a very large number of secondary producers to whom the government has also addressed the same question; they seem to have given an assurance to the government that they will control the price and try to reduce the prices. So to that an extent, it gives a relief to the construction sector."

 

Jain has a warning though. He feels that the impact of the government move would be very limited - the TMT and GPGC are not very large segments of the main steel producers, he feels.

He reminds that in the past, lot of these measures were tried and implemented. But on the ground, not much took place. "The reality is such that there is a huge differential between the landed prices of steel and the domestic prices, which is prevailing."

 

He feels that at this point of time, there is not much of a risk to earnings at this stage. "I think we should wait and watch and see how things proceed. But globally, the steel market is very strong and domestically we are going to import large amount of steel. The real issue to be addressed is the supply side issue. We need to get the domestic capacity on stream and enable the domestic steel producers to get captive mines to ensure that their cost is lower and the issue should be addressed on the other side, rather than on the immediate price point issue."

 

Jain is very positive on the Indian scenario for investors in the steel market. "if you were to see this globally the steel stocks are pretty high and there have been a big de-rating in the steel stocks. So the Indian steels cannot under perform for a very long time and if you see among the futures growth that is going to be coming in the next 5-10 years, it is largely been driven by India and even Chinese growth is going to slowdown from this year onwards. So I think India is an exciting market for steel investors," he said.     

 

Mehra feels that the Indian steel industry cannot match up the differential between the domestic and global prices immediately. "The fact is that the way the cost of the steel making are going up, the prices have to move up to what levels we will able to move that depends on the market because it is not necessary that we reach the levels of the global pricing because that the market may not be able to absorb. So how the market responds also has to be seen. The fact is there is a differential right at this point in time within global prices and our own prices to an extent of about USD 150-200/tonne," he said.

 

Jain added, "The way the raw material prices have increased, there the increase is going to affect different companies very differently. Some of the Indian companies have very strong competitor advantage in terms of having captive iron ore mines and partially coalmines also. So the effect is going to be very differential. So clearly the ones to standout winners will be the companies which have their own iron ore mines have the coal blocks, have the power plants."

 

Jain also pointed out that on the coal side, the raw material impact is going to be quite severe for domestic companies, which is what they are trying to pass on through steel price increase; which is fairly reasonable. "The international market-pricing scenario demands a price increase. So clearly to our steel company is not to raise prices is very difficult at this pint of time. I think they all have huge capex plans lined up SAIL is going to double the capacity over the next three-five years. JSW Steel is going to increase significantly Tata Steel is also going to increase. So all of them have those capex plans. I think that needs to be taken into consideration before asking for a price reduction, or rollback or restraint. So clearly the focus is to allow these companies to grow and to send the markets at different price and if probably another measure could be lower in excise duties, which could take care of inflation for a while."