The Hindu Business Line : Mounting steel prices hit infrastructure projects

SURGING steel prices have dealt a debilitating blow to construction companies in India, applying the brakes on execution of several major construction projects, including some of the road projects of the National Highway Authority of India (NHAI).

While most of the big-size projects have been recording a comparatively slower pace of progress, many smaller projects have been altogether abandoned by contractors, who felt it was cheaper to cough up the penalty for withdrawal from the contracts than to continue with it, industry sources say.

Steel — both the long products and flat products — constitutes a vital input for the construction industry, which consumes about 15 million tonnes (mt) out of the 36 mt produced in the country. It accounts for nearly 30 per cent of the total construction cost.

"A rise of 100 per cent in the cost of steel in the last three years is an unimaginable burden on the (construction) industry. This has affected the implementation of major infrastructure projects in the roads, power, irrigation, port and airport sectors," an industry source pointed out.

Says Mr S.A. Reddi, Deputy Managing Director of Gammon India: "In the last six months alone, steel prices have risen by Rs 10,000 per tonne, an almost 50 per cent increase. The Government should step in to control the prices, for otherwise infrastructure development will be badly hit."

Analysts say that the prices of Indian steel till 2002 witnessed only moderate fluctuations, but the situation changed dramatically after that. For example, the price of a 12 mm reinforcement bar was Rs 17,100 per tonne in July 2002, which increased to Rs 20,800 by July 2003 (21.6 per cent increase) and touched Rs 27,000 by July 2004 (57.8 per cent increase).

As a matter of fact, on a request from the Construction Industry Development Council (CIDC), the Ministry of Statistics and Programme Implementation, is working on a proposal to develop a trigger mechanism to counter the situation being faced by the industry. As part of this initiative, the Ministry has constituted a Working Group to recommend a generic trigger mechanism to deal with the price rise.

The Working Group, which has held two rounds of meeting, is focusing on deciding the yardstick for measuring the upward/downward variations of the price of steel and cement and the benchmarks beyond which the trigger mechanism would be operative.

The surge in steel prices has prompted the construction industry to seek Government intervention. "The Government should step in to control steel prices. The option of stopping export of iron ore should also be seriously considered, as domestic steel producers have been complaining that cost of ore had gone up, forcing them to increase steel prices now and then ," an industry analyst felt.

Another suggestion from the industry is that there should be an alteration in the price adjustment mechanism in contracts so that reimbursement on steel component is based on Steel Authority of India Ltd's (SAIL) list price.

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