Economy

Hot steel cools pace of Railway projects

Mamuni Das/ Kuwar Singh New Delhi | Updated on March 23, 2021

Domestic steel prices have risen sharply by around 40% during Oct-Jan this fiscal   -  istock.com/DedMityay

Soaring steel and copper hurting electrification project of vendors, too

Higher steel prices have started hitting Railway projects to such an extent that projects are getting delayed, with contractors slowing procurement. Also getting affected are the electrification project vendors because of soaring steel and copper prices. Meanwhile, Steel Ministry officials are confident of the prices going down this year.

While the freight corridor project has price variation clause to compensate for such eventualities, it is not enough.

“The sharp increase in steel prices in last six months has become a big challenge. For us, steel is a key component for tracks and bridges. We are seeing an increase in demand for claims under price variation clauses, particularly from contractors of engineering procurement contracts, which were awarded much earlier,” Ravindra Kumar Jain, Managing Director, Dedicated Freight Corridor Corporation of India Limited (DFCCIL), told BusinessLine.

“Large contractors can still manage, but it is a big challenge for others. Earlier, contractors would buy steel and stock it for use. Also, steel is not being sold on credit now. So, now, contractors are avoiding ordering till the last moment when they would actually need to use the steel,” said Jain. “Our contracts usually have a range of price variation clause that does not take care of sharp spikes,” said Jain.

“A typical Railway Electrification contract comprises overhead catenary equipment, traction substations, signalling and telecom, electric works and associated civil buildings. In a typical project cost break-up, copper and steel contribute to 25-30 per cent and 15-20 per cent respectively,” Rajeev Jyoti, Rail Business, said.

Jyoti indicated that the prices of these metals have gone up by more than the extent to which the company will be compensated as per its price variation clause.

LME prices

“In the last one year, London Metal Exchange copper escalated by around 90 per cent and cost of steel increased by 26 per cent. The price variation formula in the contract document is based on Reserve Bank of India indices. RBI indices are not well correlated with LME for copper and Indian Electrical and Electronic Manufacturers Association for steel. All these uncontrollable variables significantly increase the electrification cost,” Jyoti said.

One of the Railways’ coach production unit official said it is seeing 8-10 per cent increase in steel prices compared to last year. However, the spare part prices are not increasing probably because vendors are taking a hit on their margin to grab the contract as last year there was a dearth of contracts.

Domestic steel prices across product categories have risen sharply by around 40 per cent mainly during October -January this fiscal. Transport Minister Nitin Gadkari has alleged that big players in the steel industry were cartelising to hike prices artificially. The industry, however, argues that the sharp rise in steel prices in other countries shows that this is the work of the market forces.

Domestic steel prices fell 6-8 per cent month-on-month in February. This correction is likely to continue, according to Ranjan Bandyopadhyay, Executive Secretary, Joint Plant Committee, Ministry of Steel.

This slide is mainly due to the rise in imports, following the 2022 Budget decision to reduce the import duty to 7.5 per cent across product categories such as primary or semi-finished products of non-alloy steel, long products of non-alloy, as well as stainless and alloy steel. Kicking off with a low production base in financial year 2021 due to Covid-19, the industry is expected to grow by about 9-10 per cent in the financial year 2022.

Published on March 23, 2021

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