Domestic steelmakers raise product prices for a second straight month

In a bid to address margin compression and in anticipation of demand pick-up, domestic primary steel producers have raised product prices by 2.5-3 per cent for December.

“Since margins have become unsustainable, cost pressures versus the steel product price is not helping producers meet ends. This is the primary reason for the product price hike this month (December),” Jayant Acharya, director (commercial & marketing) at JSW Steel told Business Standard.

The December price hike is happening for the second consecutive month. In November, producers raised steel product prices between Rs 500 a tonne and Rs 1,000 a tonne, after a gap of about six months.

While steel producers expect the market to embrace price hike, industry officials are of the view that the consumer is not ready and continuous hikes of this kind may not be sustainable.

“There is absolutely no demand from the infrastructure segment. Also, the auto demand was good only in the festive month of October. Overall, there are no strong demand indicators as of now for steel. Continuous price hikes in such a scenario may be difficult to sustain,” a Mumbai-based trader said.

The index of eight core infrastructure industries contracted 5.8 per cent for October 2019, which was its lowest level since the construction of the index with 2011-12 as the base year. Among the eight segments, the steel industry witnessed a 1.6 per cent fall in October, worse than a 1.5 per cent drop in September. In October last year, the steel industry had witnessed 2.4 per cent growth.

Meanwhile, steel producers have sealed half-yearly contracts for the auto segment factoring in the recent fall in steel prices. “There is a reduction from H1 (the first half of the year) to H2 (the second half). However, the numbers (quantum) are different from customer to customer, so I wouldn’t like to give a single (price reduction) number,” said Acharya.

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While some players had said the price cut was by Rs 6,000 a tonne, others were of the view that the overall domestic steel price drop was sharper, close to Rs 8,000 a tonne, in the last three to four months, and hence contracts could have closed at much lower price levels.

Among top domestic steel producers, Sajjan Jindal-led JSW Steel, Essar Steel, and Tata Steel are into flat products used in the auto sector, while state-owned Steel Authority of India (SAIL) and Jindal Steel & Power cater for the construction and infrastructure segment that uses long steel products.

On the inventory front, too, the view of the producers differed from that of industry officials.

At one end, Acharya of JSW Steel said: “Inventory-wise, the industry is in a comfortable position as the producers have lowered their production which helped inventory dilution. Even the channel inventories have come down. Exports have also helped bring down inventories.”

According to the Joint Plant Committee data, India’s steel exports during April-September this year rose 22 per cent year-on-year to almost 4 million tonnes.

“Steel producers are lowering production by advancing capital repairs but stockists and traders continue to have slightly higher inventory. Even the SME (small-and-medium enterprise) sector, which usually keeps no inventories, is having stockpiles this time,” said Sushim Banerjee, director general at Institute for Steel Development & Growth (INSDAG).

Capital repair, which is the maintenance of the blast furnace of the steel plant, usually takes place in April. However, companies have advanced this activity to November this financial year citing weak demand scenario, according to industry officials.

Steel manufacturers call for parity in iron ore, coal block auctions

Steel producers have asked for a level playing field in auctions of coal and iron ore blocks. Although electronic auctions of both coal and non-coal blocks are governed by the same legislation - Mines and Minerals Development & Regulation (MMDR) Act 2015 - steel producers feel there is a glaring disparity between the eligibility norms for bidders. While in case of coal blocks, the capacity of the end use plant and quantum of coal is considered, there are no such riders for auctions of non-coal blocks, including iron ore.

Steel makers have sought the PMO''s intervention to establish parity between coal and non-coal block auctions.

Under Coal Block Allocation Rules 2017, a company would be eligible to bid for any Schedule II coal mine, or an operating coal mine, if it has incurred expenditure of at least 80 per cent of the project cost of the unit, or phase of the specified end use plant, for which the concerned company is bidding. If the end use project is being commissioned in phases, the other phase or unit will also be eligible provided a minimum of 40 per cent of the expenses have been incurred.

In contrast, for non-coal block auctions, the Mineral Auction Rules of 2015 mandate that a particular mine, or mines, may be reserved for specific end use. According to the model tender document, companies with installed plants are eligible for bidding. However, the document does not mention the requirement of capacity of end use plants.

"The skewed norms in Mineral Auction Rules, 2015 will lead to the concentration of ore in a few hands. Not only will this phenomena have an adverse effect on the balance iron ore, pellet and steel producers, but also lead to a manipulation of the market and pricing, thereby hurting the consumers," said an industry source.

Besides, pellet and steel manufacturers, who lack captive iron ore mines, will have to fall back on market sourcing, or expensive imports, to keep their operations afloat. However, such end use plants will lose the competitive edge and contribute to the escalation of steel prices.

Further, under sub-rule 5 (f) of Coal Blocks Allocation Rules, 2017, the central government has the discretion to spell out the maximum number of coal blocks that can be allocated to a company, or its subsidiaries, or associate companies. On the contrary, there is no cap on the allotment of mineral blocks or the amount of mineral resources. Successful bidders can take as many blocks at auctions provided they conform to the area limits listed under Section 6 (1) (b) of MMDR Act, 2015.

An official with a leading steel company said the anomalies in auction norms can be corrected with amendments in Mineral Auction Rules, 2015.

“In case of auctions of captive mineral blocks, a bidder may be considered eligible for bidding only if its 50 years requirement of mineral for specified end use plant is equal to, or more than, the resource of the mineral block plus resource already held by him. Moreover, the minimum capacity of mine may be pre-defined in the tender document and MDPA (Mine Development and Production Agreement) are made stringent so that a defaulting miner does not get away with a small penalty for the shortfall in production”, he said.

Data posted on the Mines ministry website says that 68 non-coal blocks have been put to online auctions (as on August 6)- a mix of 25 limestone, 24 iron ore, six bauxite, four gold, three graphite, three manganese, two copper and one diamond blocks. The combined valuation of the auctioned resources is pegged at Rs 2.46 trillion.