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BL Research Bureau

The recent decision of steel manufacturers to cut spot steel prices by about Rs 2,000 a tonne has been taken on the back of a softening trend in global steel prices. Global steel prices have declined by about $100-150 a tonne since July, with expectations of an overall slowdown in global demand contributing to the softening. The decision by domestic producers to cut prices suggests that imports have become more competitive recently, the fall whittling down the premium that global prices earlier held over domestic price levels. Domestic steel prices remained at a 16-17 per cent discount to global prices until end-August, on the back of policy pressures on producers to hold the price line.

Companies such as JSW Steel and Ispat Industries may be more vulnerable to pressure on margins resulting from the latest price reduction, than companies such as Tata Steel, which have strong backward integration with relation to inputs. Prices of public sector major SAIL, were already lower than those of private producers and consequently the company did not take any price cut on this occasion.

Companies such as JSW Steel had already faced pressure on its margins in the preceding quarters confronted by the double jeopardy of holding the price line on the one hand and rising input costs on the other. Contract prices of coal, a key input have already doubled over the past year and are expected to rise further over the next one year.

Iron ore prices on a contract basis, registered an increase of 85 per cent over the last one year and are also expected to remain firm.

Companies such as Tata Steel or SAIL which market a larger proportion of their output through long-term contracts may not be directly impacted by changes in the spot price, though a sustained softening of steel prices could lead to long-term contracts also being re-priced.

Domestic steel producers had also acquiesced to a moratorium on steel prices for three months in May, which was reiterated once again in August. Stock prices of steel companies have slid in anticipation of falling margins as a result of the price cut.

However, end users of steel such as construction, auto and white goods sectors may benefit from the price cut.

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