Steel is the biggest villain in the current war on inflation. Union Finance Minister P. Chidambaram recently stated in Parliament, "Despite fiscal steps taken by us, some sectors like steel continue to exhibit sharp increase in prices. Steel and steel products contribute about 21.3 per cent of inflation."
A microanalysis reveals that the iron and steel sub-group has recorded 35 per cent y-o-y escalation in wholesale price index in the week ended April 19, over 9.5 per cent a year ago. The WPI of basic metals and alloys, of which iron and steel is a major constituent, has also shot up 31 per cent annually, causing one-fourth of the overall inflation of 7.57 per cent. Around two-thirds of 12 per cent rise in the ERIL Index of Cost of Project Costs, which measures cost escalation in projects and capital goods, is the result of shooting WPI of basic metals and alloys.
Fuelling the rise in steel prices - a global phenomenon - is a sharp escalation in input costs. Iron ore prices have shot up in the last six months due to a strong demand from China that currently accounts for 45 per cent of global exports. Coking coal shortage is also pushing up steel prices globally, tipping at $1,000 per tonne.
Viewing this as largely a supply-side phenomenon, the government has taken several measures to augment domestic availability of steel products to soften prices. These include reduction in the basic customs duty on pig iron and mild steel products viz. sponge iron, granules and powders, ingots, billets, semi-finished products, hot rolled coils, cold rolled coils, coated coils/sheets, bars and rods, angle shapes and sections, and wires from 5 per cent to nil.
To rein in the prices of TMT bars and structurals, which are commonly used in construction of houses, their import is exempt from countervailing duty of 14 per cent. Basic customs duty on metallurgical coke, ferroalloys and zinc - three critical inputs in steel - has been cut from 5 per cent to nil.
To discourage exports, the government has imposed export duty of 15 per cent on specified primary forms and semi-finished products, and hot rolled coils/sheet; 10 per cent on specified rolled products including cold-rolled coils/sheets and pipes and tubes; and 5 per cent on galvanised steel in coil/sheet form.
Earlier, in the Union Budget last February, import duty on melting scrap was reduced from 5 per cent to nil and the general rate of excise duty brought down from 16 per cent to 14 per cent.
Considering the fact that the country's steel demand is currently growing by 12-13 per cent, the government is taking steps to augment capacity in the medium term through both greenfield and brownfield capacity expansion. The National Steel Policy has set a production target of 110 million tonnes of steel by 2020 but, according to some forecasts, this may be achieved even sooner.
Producers, particularly prime steel producers, have complained that steep price hikes in raw materials like iron ore, shredded scrap and coking coal have caused steel price hikes.
However, we should share the government's anxiety over escalating basic metal and alloy prices more from the point of view of their impact on project cost escalation than the common man to whom WPI relates distantly and basic metal prices even more remotely.
But, then, we should also be equally worried that though there are various ways of improving margins even while eschewing steep price hikes, coming down heavily on producers to bring down prices of basic metals and alloys at any sharp uptrend in their WPI should not send wrong signals to future capacity build-up in the sector. Metals and alloys, which constitute critical inputs for construction industry and the machines that make industrial projects possible, entail huge investment and long gestation periods. And here huge stakes are involved.
Thus, encouraged by a buoyant global demand and fast rising domestic consumption, investment in basic metals and alloys has only recently entered the high-growth phase. We need to take care to see that price reductions are not forced to the extent that it impinges on the economic viability of steel units and leads to tardier implementation of projects in this sector.
As of March 2008, only a fourth of Rs 3.07 trillion envisaged investment in metals and alloys was under active implementation with a larger three-fourth still stuck at the drawing board due to various reasons.