Will the demand slowdown bring steel prices down?

Chandrakant / 16 Dec 2011

It is now quite evident that the demand for steel has come down in the last few months due to a slowdown in the economy. However, the question that remains is whether this will bring down the steel prices or not.

It is now quite evident that the demand for steel has come down in the last few months due to a slowdown in the economy. However, the question that remains is whether this will bring down the steel prices or not.

The following are a few points which explain why steel prices will not come down in India:

  • The sharp depreciation in the rupee will make imported steel costlier, which will deter consumers from buying steel from the international markets.
  • The major raw material consumed in steel production is coking coal. Due to lower availability in the country (4% of the total reserve), this is imported from Australia and other nations. The import costs also constitute 50%-60% of the total cost of production.
  • After a fall in coking coal prices from levels of US$ 300 to US$ 280, it was expected that the steel players will pass on some of the benefits by lowering the steel prices. However, the sharp depreciation of the rupee against the dollar has negated all the gains that they would have passed on.
  • Further, with higher coking coal prices due to the weakening rupee, along with higher interest costs and freight costs, companies are left with little room on the margins front. Therefore, in order to maintain their margins, steel players will not go for a cut in the steel prices in the short-to-medium term.
Taking these points into consideration, we, at DSIJ, believe that while steel prices would have come down in a normal scenario, the weakening rupee has actually caused them to remain firm despite some relief on the prices of coking coal.