Aug 8, 2008

Business - No Clash for steel

The three-month price freeze that the Indian steel majors had agreed to, in response to the government’s request, is over but there is unlikely to be any price increases announced this month. The industry appears also to have heeded the government’s call to go easy on exports, in return for the government not imposing formal restrictions and an export tax. Exports are down in the June quarter by 31 per cent over the same quarter of 2007, despite global prices remaining higher than domestic prices by a third. This new mood of cooperation (arguably achieved by pointing the barrel of a gun) is in sharp contrast to the face-off that occurred between the Indian cement industry and the government some months ago. The main reason for the lack of sparks in steel is that both the government and the industry have left each other some room for manoeuvre, even while sticking to their public postures. The government has been able to get a price freeze because all prices have not been frozen, only spot prices which account for no more than 40 per cent of tonnage. Prices fixed via long-term contract or relevant for re-rollers who export the final product are not affected.
The industry is holding its fire because it is still waiting for the outcome of the price re-negotiation between the state-owned iron ore exporter, National Mineral Development Corporation, and Japanese importers. If NMDC gets a hefty price rise from the Japanese, as the Australians have from the Chinese, then iron ore and steel prices will rise in tandem. The industry is also in fine fettle. It has just turned in a good quarter and is not expecting either the domestic or international scenario to turn adverse. In contrast, the cement industry is already facing a significant cooling of domestic demand. It is true that if the major Indian firms had been able to raise prices they would have been able to gain exceptional returns, as the global firms have been able to do, and build up reserves with which to face the next downturn in this very cyclical industry. The major Indian steel makers appear cool perhaps because, being global least-cost producers, they have confidence in the future. There are no long-term prospects of demand cooling off in either India or China, despite the present slowdown, and the appetite for steel in these two economies is likely to remain robust for a long time.
Given Indian costs, the industry should be able to sell whatever it produces, at home or abroad. The main uncertainty is how much it will be able to produce in the future. The massive greenfield expansion plans of the industry are held up by uncertainties over land, iron ore and rehabilitation of those who will be displaced by the projects. There is thus a serious challenge for state governments in Jharkhand, Orissa and Chhattisgarh, which also happen to be affected by Naxalite disturbances. While India has to write a new chapter in rehabilitating indigenous people typically affected by such projects as they are both poor and do not have the skills to survive in a modern economy, state governments have to get the better of the intense lobbying among the contestants for iron ore and make the necessary mine allocations. In steel, there is enough for everybody — local people, producers and consumers — provided the regulator sets the right rules.

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