The Hindu Business Line : Steeling up

NOT SO LONG ago steel producers were at the receiving end of the market and consumers enjoyed a prolonged period of soft prices. The Government then had let the market forces prevail even if it meant huge losses for the public sector unit, SAIL. The wheel of fortune has turned with prices at record highs conferring a bonanza for the producers. This time the Government has chosen to intervene on behalf of the consumer; evidently, in the trade-off between the interests of the producer and the consumer, the Government has chosen to favour the numerically stronger consumers.

The announcements over the weekend slashing the duties, both Customs and excise, on certain raw materials and finished products, are an attempt to rein in prices. With elections just weeks away, the political compulsions behind the move are unmistakable. The expectation is that prices of various varieties of steel will fall in the wake of the announcement. Yet the market situation now, both domestic and international, holds out the prospects of a renewed increase in product prices. Demand is zooming, thanks to massive construction work under the National Highway Development Project, the boom in housing construction fuelled by the low-interest rate regime and tax sops in successive Budgets, and the general revving up of the economy. International prices too are ahead of domestic prices. Yet, Indian steel producers will be hard pressed to take full advantage of the situation. At the Government's insistence, they have agreed not only to hold domestic prices of products but also to step up availability even if it means cutting down on exports. And to pressure them to do it, the Government has frozen the DEPB (duty entitlement passbook) scheme.

Also applying the pressure on the steel producers are skyrocketing raw material prices, particularly of coking coal and metallurgical coke, caused mainly by their scarce supply. With domestic production of steel rising sharply, China has not only drastically cut down on export of coking coal and metallurgical coke but also withdrawn incentives it provided exporters, causing a jump in export prices. The shipping freight from China too has become prohibitive. A section of Indian steel producers is insisting on curbs on iron ore exports from India to China; alternatively, it is suggested that the country's strength in iron ore should be leveraged for clinching a deal with China that would ensure a steady supply of coking coal and metallurgical coke. Neither of these ideas is feasible. The former would hurt iron ore exporters, and would run counter to the reform process that has worked well so far. And the latter presupposes that the Chinese would submit themselves to arm-twisting. Steel producers may have to rest content with whatever profit opportunities the bull market has offered, instead of seeking more policy sops to reinforce them.