Demand-supply mismatch to keep steel prices low: Expert

Global steel makers are seeing lower prices owing to falling steel demand. Lower demand for raw materials has become a key concern.

Tarang Bhanushali, Metal Analyst at India Infoline

said he wouldn't buy steel at current levels because market is not expected to bounceback next year. “On a whole, the demand would be lower than the current, if you look at FY10 estimate – that would be around 5-10% lower than FY09. In fact if we look at the capacities coming onboard we would be adding some 15 million tonnes of capacity by end of FY10.”

Therefore, according to him there is a very big imbalance in the demand supply scenario which would keep domestic prices quite lower than the current levels.

J Mehra, Director of Essar Group and CEO of Essar Steel , said the variable cost for steel will vary depending on the route for steel making. On the variable, he expects steel prices to be around Rs 22,000-23,000 per tonne.

He further stated that the domestic demand in India is picking up and prices are stable whereas demand elsewhere in the world is bad and there has been a very heavy reduction. Going forward, he believes that by the second quarter there should be some pick visible or at least a stabilisation of the demand in the western world or most of the developed economies.

Also Read: Steel may not outperform in the long run: SBB

Here is a verbatim transcript of the exclusive interview with J Mehra and Tarang Bhanushali on CNBC-TV18. Also watch the accompanying video.

Q: Could you walk us through at what price do you believe variable cost get covered for steel companies? At what price variable plus fixed costs get covered and how far or how below these points we are currently?

Mehra: It will largely depend upon what is the route anyone is following and making the steel – if it is a coal based or gas based or it is based on scrap. So the variable cost will vary depending on the route for steel making. It is difficult to say therefore any one number which will be expectable for all the three but with the coal prices which have just been announced with the Japanese and probably that is a trendsetter, and based on what are the prices on the iron ore one would expect that anything less than – if I put it in Indian terms – anything below Rs 23,000 per tonne. On the variable it will be around Rs 22,000-23,000 per tonne and then the fixed cost is dependent on the technology and what the kind of investment people have made is.

Q: Coming to the demand supply scenario at the moment – one heard that demand that demand had improved in January and February. How is demand looking to you in March and from hereon and more importantly how would you therefore see prices spanning in the next quarter?

Mehra: As far as the demand is concerned, it is different in different regions. The domestic demand in India is picking up and the prices are stable. Whereas the demand elsewhere in the world is bad, there has been a very heavy reduction. But going forward if one looks at what has been the liquidation of inventories, I believe that by the second quarter there should be some pick visible or at least stabilisation of the demand in the western world or the most of the developed economies.

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