Impose a price band on steel products?
21 Jul, 2008, 0014 hrs IST, ET Bureau
Lalit Thakkar, Director, Research, Angel Broking
A free market is vital for the sector’s growth
Domestic steel industry has been going through challenging times, with raw material prices rising unabated and government trying to cap final product (steel) prices in order to keep inflation under check.
Notably, the government has taken several measures in the past six months to keep a check on steel prices, which contribute around 3.63% in the WPI. Now, after holding prices for three months since May 2008, the battle between the government and steel players has erupted again. With the anticipation of players increasing prices very soon, government is trying to counter this with the imposition of a price band on steel products.
In our view, the price band should not be imposed on steel products as it would be unfair to the domestic steel industry. Notably, global steel prices are ruling at 30% premium to domestic prices. Global prices have increased by 50-60% in 2008, as compared to just 20% rise in the domestic market. The hefty price increases globally reflect the higher raw material costs like iron ore and coking coal. Iron ore prices have climbed 100% globally and coking coal prices have tripled. It is to be noted, India has limited reserves of coking coal and most of the players rely on importing it, thus necessitating a price increase.
Also, price band or any such control would send negative feelers to global investors/steel players who are contemplating huge investments into the country. Also, the domestic expansion projects in the country could get affected. We believe that at this time, when steel production in India is in deficit, with the country becoming a net importer of steel after a decade, government should focus more on relaxing regulations with respect to land acquisitions, mine allocations, etc.
The government needs to allocate more and more blocks of coking coal and iron ore and also aid the development of mining infrastructure in the country rather than regulate the industry by imposing restrictions. A free market policy is important for the survival and growth of any industry.
(Views are personal)
Anil Sureka, ED (Finance), Ispat Industries
It will only distort the market further
It is ironic that at a time when the government is going all out to secure a nuclear treaty, there should be signals emanating from the same government about plans for a price band for steel products. Such a move will be a classic case of one step forward-three steps backward. In the same breath, we are today talking of globalisation and administered pricing.
It is true that domestic steel prices have climbed since the beginning of this year, but so is the case with most products including food items and other essential goods. Internationally, steel prices continue to rise and this trend may continue into 2009.
Mercifully, the government acknowledges that steel prices are climbing due to steep increase in input costs. Still, there are efforts to hold price line and enforce price-bands. Despite the continued steep rise in the price of raw materials such as iron ore, metcoke and metal scrap (which has experienced doubling of in a year), major domestic steel companies cut prices of flat steel products by Rs 4,000 per tonne in May 2008 to help the government contain inflation.
That apart, domestic primary producers are selling steel in the Indian market at $300-$350 per tonne less than the international prices. Also, exports have been cut by 31% over the past three months to make more steel available in the domestic market.
The retail prices of these products, however, started rising within a month-and-half of the price control, establishing the fact that such artificial price reductions do not reach the retail user for whom such concessions are meant.
Any attempt to artificially hold prices of steel through a price band or any such measure will only further distort the already distorted domestic market. Solution to controlling prices lies in taking appropriate policy and fiscal measures to augment domestic supply by helping the industry add new capacity. Unfortunately, current efforts to take away the freedom of steel companies to price their products not only impact their ability to raise funds for expansions, but also scares away prospective investors. It is time policymakers focused on long-term remedial measures rather reacting to short-term volatility in prices.
(Views are personal)
About Us | Advertise
