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Steel price reduction
will it check inflation ?

By Arachana

Two days after the government cut in import duty on steel, integrated steel producers started announcing selling price cuts and all public and private sector companies announced price cut in the range of Rs.500-2000 with immediate effect. This was one of the very few occasions, when steel prices have been reduced in the last two years. Every time these companies went on revising producers prices upwards laming an excuse that international prices of steel and raw materials are shooting up.
Though some experts say that import duty reduction is not the sole reason for cut in product prices but internationally these prices are declining and Indian prices are moving in tandem with that on the international level. Hence, this decline was imminent. But, analysts feel that it was the result of a serious intervention by the Ministry of Finance that prompted the Tata Steel chief to announce a price cut.
According to calculations made by the Joint Plant Committee for steel, which functions under the administrative control of the Ministry of Steel, steel prices have increased by about 45 per cent on a week-to-week basis in the past one year, contributing to around a fifth of the rise in inflation rate. This, however, is an average figure because prices of various steel products have not increased uniformly.

A political compulsion
In fact, Mr. B Muthuramanís denial of having forced his decision to cut steel prices immediately in order to put a check on rising inflation proved untrue as the company was contacted by the Ministry of Commerce to take immediate action. Hence, political compulsions were the only reason for steel companies to cut prices. Otherwise, steel prices have been looking up quite some time now and there has been good demand of steel in domestic as well as international markets. Instead of prices going up, they are declining. The government had recently effected a 5% customs duty cut on non-alloy steel. This, however, has not prompted price reductions. Automobile manufacturers say that the price reduction would ease the cost-push effect, although there wonít be much of a positive impact in the current quarter. Automobile manufacturers now have quarterly contracts with steel suppliers, and the price reduction by steel manufacturers will have some positive impact in the current quarter. Internationally, steel prices have gone up sharply in recent months. Only if the softening in prices continues, automobile manufacturers will have three cheers. Steel prices in India have remained stable for the past five months at Rs 25,000-25,500 per tonne. A steel industry official pointed out that all the manufacturers have cut prices only for their direct or long-term customers. This means that the trade segment may continue to pay at the earlier rates of Rs 25,000-25,500. The trade segment includes the spot market where small quantities are bought and where long-term price agreements are not involved. This means that retail traders of steel may have to buy from manufacturers or dealers at the earlier rates.

Rising inflation: a matter of concern
Rising inflation was a matter of concern in recent past. The government felt that steel price rise was one of reasons which contributed a lot in historic level of inflation. Iron and steel carries a weight of 3.64 in the wholesale price index (WPI). The inflation rate touched a 41-month high in the last week of July 2004 compared with the corresponding week of July 2003. The weightage of steel in WPI calculated as a percentage of the increase in steel price over this period, which is 45 per cent, and then relating it with the increased inflation rate of 7.61 works out to 0.21. Taken in terms of percentage, it is found that this 45 per cent increase in steel prices has accounted for around 20-21 per cent increase in the overall inflation rate. This set the alarm bells ringing in the government, particularly in the Ministry of Finance. According to informed sources, the Finance Minister had expressed concern over the issue at a meeting with a delegation from the steel industry in the second week of August. Last weekend came the final act when the Finance Ministry took up the issue with the largest private sector producer following which Tata Steel decided to roll back prices.

A rollback in prices
A day after Tata Steel announced a price cut of Rs.2,000 per tonne on all products, Steel Authority of India Ltd (SAIL) and other leading steel majors announced a southward revision in prices in the range of Rs.500-1000 a tonne. SAIL has reduced prices by Rs 1,000 a tonne for flat as well as long products with immediate across all segments. Taking into account the corresponding impact on excise duty and sales tax payable by the customer, the effective reduction in cost will come to about Rs 1,150 per tonne. Essar Steel cut prices by Rs 560 a tonne in its sales price (including excise duty) for its direct domestic customers. The price reduction takes into account the differential cost structure of various steel producers as Essar Steel does not have its own captive iron ore/coal mines and control over its fuel cost which some of the other steel producers have. Essar Steelís monthly sales stand at two lakh tonnes, of which exports account for 30,000 tonnes. Jindal Vijayanagar Steel Ltd (JVSL) also has slashed prices of hot rolled coils and sheets by Rs 600 a tonne (inclusive of excise duty) for all its customers. Ispat Industries Ltd has slashed prices by Rs 500 a tonne on hot rolled products, excluding taxes. The reduction will be effective for all its domestic end-users. Public sector steel major Rashtriya Ispat Nigam Ltd (RINL), has announced price cuts of Rs.1,000 across the board on all grades of steel with immediate effect.

Profit margin to be hit
The current reduction in steel prices is likely to impact profit margins of some of the companies, especially those that do not have backward linkages into raw material supplies. However, a stable steel price scenario is indirectly beneficial to steel companies. Volatility in prices does not augur well in terms of demand or marketing of steel products. A stability in price always proves beneficial for producers and consumers while fluctuations always keep both sections players in dark fearing further uncertain direction which may or may not lead to profitability. One can think of profitability only when there is a stability in price. SAIL has all along been a strong believer in stabilisation of steel prices and has substantially reduced exports to make more steel available in the domestic market. A price reduction by SAIL will have a positive impact in lowering domestic steel prices. The benefit of higher profit margins will be directly passed on to consumers.
Essar Steel has taken various measures to provide stability to the domestic market, including maintaining the same price since March 2004 and introducing quarterly pricing. The current price reduction not only provides stability to the domestic market but also will give competitive advantage to all consumers of flat products as even today domestic flat product prices are significantly lower than the prevailing international price with a difference of Rs.3000 cif.

Lower prices till March 2005: Tata Steel
The recent reduction in producers price by Rs.2,000-per tonne by Tata Steel is expected to remain effective till March 31, 2005, regardless of any likely rise in input cost. This is a historic decision Tata Steel has taken which will be applicable only to its direct domestic customers, who account for 70 per cent of the companyís sales volume. There will not be any reduction in export prices. The company will also focus on the domestic market and try to reduce export volumes. About 30 per cent of the products is distributed through thousands of retailers and the company is not in a position to reduce their prices.

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