India's steel companies are likely to enter into a pricing war as input costs have come down significantly and demand could peter out after the elections.
"There remains a big question mark over the steel demand post elections, and if things don't go right, a price war will be inevitable.
The market could see a 10%, or $50 per tonne, drop in prices in the next two months," said an analyst with a domestic brokerage who did not want to be named.
Steel firms are also readying for the challenge. A senior official from a private steelmaker said, "We know that demand post-elections might drop and we might have to lower prices. However, we can't comment on the extent of the price roll-back." He added that the lower cost of production will definitely give companies some space to reduce prices.
Domestic steel prices (HR coil) are down to around Rs 28,000 per tonne from highs of around Rs 45,000 a tonne in June 2008. This has hit the profits of companies in the third quarter.
JSW Steel, for instance, reported a loss of Rs127 crore in the third quarter while its income rose marginally to Rs 2,826.74 crore. Tata Steel reported a 44% drop in its net profit to Rs 732 crore and Steel Authority of India's profits dropped 56% in the quarter to December 2008. The drop in production costs will provide some relief for steel firms. Most of them are expecting to renew coking coal and iron ore contracts at 60% and 40% lower rates, respectively.
"Pig iron prices have come down from recent highs of Rs 24,000 per tonne to Rs 16,000 per tonne now. Also, BHP Billiton has signed coking coal contracts with Nippon Steel of Japan at around $120 per tonne, a 60% fall from rates six months back. This will be a benchmark for the global industry and cost of production will be lower substantially," said an analyst.
An official from a Mumbai-based steel company said falling international prices of steel was a concern. "If prices in the international market fall, we will have to reduce to be in tandem with them." He felt the government should increase import duty to 15% to protect the domestic industry. "Such a measure will help us if the international prices fall too much. Otherwise, people will just import steel, forcing us to match the international prices."
Source: DNAIndia
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