India’s construction industry will be badly hit by the escalation of base metal and energy prices even as domestic steel and aluminium makers hope to reap the advantage of higher international prices through increased exports.
Metal prices have been soaring since the invasion of Ukraine by Russia on February 24 and the economic sanctions slapped against the latter by the US and European countries. Russia is a big producer of steel, aluminium and nickel, besides oil, and supply disruptions have caused prices of these commodities to surge.
Global steel prices have risen over 20% in a week while aluminium prices are up by 40% this year. Nickel prices are at an all-time high of over $48,000 per tonne on the London Metal Exchange, up by over 100% since January. Copper and zinc prices too have gone up.
The construction industry has to bear the brunt of the increase in steel and aluminium price. With steel prices up by 65% and aluminium and copper prices by 30% in the country in the last 18 months, the cost of construction has gone up, said Builders Association of India vice president Neerav Parmar.
“The tender prices factor in a 5-6% hike. But the increase is much beyond that; our margins will be squeezed considerably. Private clients may understand the situation and will be ready to absorb the increase. But in the case of government projects, contractors will suffer heavily,” said Parmar.
According to Muhammed Noorsha, managing director of steel manufacturer Kalliyath Group, the price of thermo mechanically treated (TMT) bars used in the construction industry has gone up by Rs 20,000 per tonne to around Rs 80,000 tonne now.
“The construction industry, which was recovering after the outbreak of COVID-19, will soon come to a standstill as the anticipated increase in fuel cost will further raise the cost of construction,’’ he said.
Advantage steel, aluminium makers
Steel and aluminium manufacturers stand to gain through higher exports because domestic prices are still lower than global prices. Russia and Ukraine are big exporters of steel to Europe and other countries, but that supply has been disrupted by the conflict.
“There is a shortage of 3-3.5 million tonnes of steel a month in Europe and Middle East and North Africa (MENA) countries which we hope to fill,” said V R Sharma, managing director of Jindal Steel & Power Ltd.
While steel prices are around $1,200 a tonne in Europe, Indian prices are around $900-950 a tonne.
“So, there is a net advantage of $200 to 250 per tonne for us,’’ he said.
This could spur steel exports which have been looking up since last year. Steel exports from India rose 29% to 10.78 million tonnes in 2020-21. In the current financial year, in the April-November period, shipments rose by 24% year-on-year to 9.5 million tonnes, according to industry estimates.
Sharma said nickel substitutes such as vanadium, niobium, titanium and manganese can be used in carbon steel production, which make up the bulk of steel output in the country, to offset the runaway increase in the price of nickel.
“This may not be possible for stainless steel manufacturers who require a higher ratio of nickel. It is time they shifted to nickel-free stainless steel, popularised by Japanese company JFE,’’ he said. JFE Steel Corp. is one of Japan’s biggest steel makers.
Russia’s absence in the aluminium market will also favour India. “Russia’s export of aluminium to Europe and the US has been hit. This has opened these markets for India,” said Harsha Shetty, chief marketing officer of Vedanta Ltd.
He expects global aluminium prices, currently around $ 3700 per tonne, to cross $ 4,000 in the coming days. “It will definitely impact the cost of execution of projects. But India will have a higher GDP as all the natural resources will have higher value. This and the higher export value of metals will compensate for the increased cost and surge in the oil import bill,” Shetty said.
Inflation and the rupee
But a delay in resolving the conflict could cause commodity prices to rise further, adding to the risk premium, according to analysts.
“If oil reaches $150 a barrel and beyond, then inflation could be a real concern, which may force central banks to intervene,’’ said Prathamesh Mallya, assistant vice president, commodities & currencies, Angel Broking Ltd.The Reserve Bank of India (RBI) too may have to intervene to control inflation as uncertain markets and heavy outflow of foreign exchange for the import of oil, edible oil and gold may drive the rupee lower to 78-80 against the dollar, he said. To be sure, a weak rupee will improve revenue from soaring exports.