Steep rise in steel prices hits construction industry.

By Prajakta Karnik

Even as the year 2021 begun on an optimistic note with economic activities resuming and the economy crawling back to normalcy, the steep rise in the steel prices is affecting the construction industry.

Construction Times takes a look at the reasons for the price rise, its impact and the way forward.

Price On The Rise

According to the international body of iron and steel, World Steel Association, construction is one of the most steel consuming sector, accounting to nearly 50 per cent of the world demand.

In line with the increase in global steel prices, domestic steel makers also increased the average monthly price of hot-rolled coils nearly multiple times since August, rising by as much as Rs 13,800 per to Rs 51,050 per tonne in December, registering a 37 per cent year-on-year growth, as per the data of rating agency Crisil Research.

The agenct expects steel prices to remain high in the January-March 2021 quarter with a sequential price hike of Rs 7,000-8,500 per tonne. Consequently, flat steel prices are seen 14-15 per cent higher on-year this fiscal.

According to Emkay Global Financial Services steel prices touched all-time high in the domestic market and are currently hovering around Rs 57,250 per tonne Through Q3 of FY21, HRC and primary rebar prices increased by Rs 12,000 per tonne and Rs 15,500 per tonne,  respectively.

Global prices also touched an 8-year high in December on healthy demand and cost push from soaring iron-ore prices. The international prices surged to over USD 750 per tonne in December 2020 from the bottom of USD 397 per tonne witnessed during the year.

Chinese crude steel production increased significantly on the back of the infrastructure stimulus announced by the government which enhanced its appetite for steel. This prompted steel manufacturers across the world, including India to increase exports, which led to rise in prices.

Iron Ore Shortage Triggered Price Rise

State-run iron ore miner NMDC's average monthly production declined 27 per cent during April-November to 13.81 tonnes as conpared to same period last year. Nearly 1.6 tonnes of iron ore is required to produce a tonne of steel.

In the meantime, NMDC also raised the price of lumps ore from Rs 1,960 a tonne in June to Rs 5700 per tonne in January, a 190 per cent increase over six months, the state-run Navratna firm claimed that it is in tandem with the global trend, driven by rising demand in China and shortage of the raw material.

"The domestic steel production had taken a hit in 2020 mainly due to the Covid 19 pandemic induced challenges like restricted economic activities and labour shortage, among others. But as demand picked up, so did production. However, the major challenge was shortage of iron ore,” Arnab Kumar Hazra, Deputy Secretary-General Indian Steel Association (ISA).

Nearly 19 mines were auctioned last year but due to the pandemic, most of them could not be operated at the desired capacities, which resulted in shortage of iron ore. Odisha, which contributes nearly 55 per cent of the total iron ore production of the country, witnessed a significant reduction, he added.

Sector Impact

Construction and housing sectors, which are the largest consumers of long steel products are staring at the sky-high cost challenges. At the same time, domestic construction equipment manufacturers are finding it difficult to absorb the rising prices.

“The real estate sector is already going through troubled times since the last few years and the Covid pandemic only worsened it. The sector was hoping to see better days this year, but the surge in steel prices has come as a shocker. In the last few months, the input cost for steel has risen by 35-40 per cent, which is having an adverse impact on the financials of the developers,” Adhiraj Constructions Sr. VP contract and planning Alok Agarwal said.

Naredco National President Niranjan Hiranandani noted that the real estate industry is currently absorbing this rise, but if the trend continues, it will be difficult for developers to bear the additional cost. The Association has also made a representation to the government seeking intervention to ensure that the rising steel price does not adversely affect the sector.

Union Minister for Roads and Highways Nitin Gadkari had also raised concerns on the rising prices of steel stating that steel companies have raised the rates by 55 per cent in the last six months. The minister had also written to the Prime Minister Narendra Modi stating that lowering the productivity and increasing the rate is not a good strategy.

“While we are trying to come out of the impact that Covid pandemic has had on our business, we are now faced with the challenge of rising steel prices. The equipment manufacturers do not have the power to absorb this high cost burden. We may even lose our export orders,” Sany Group & Putzmeister Sany Concrete Machinery (South Asia & India) Deepak Garg said.

Domestic Demand Improves, Price To Soften

On the domestic front, the demand has recovered to the pre-pandemic level in August itself with normalisation of activities in the construction and consumption-linked sectors, but a full-blown recovery was seen only in November when sales volume surged 11 per cent on-year.

“We are now seeing an improvement in the iron ore production. Even NMDC has ramped up its capacity. At the same time, due to the continuous efforts taken by the government, the economic activities are crawling back to normalcy and so the demand for steel in the domestic market is also witnessing a significant improvement. Meanwhile, the spurt in demand in China is expected to cool down as it was driven by the infrastructure stimulus announced by the Chinese government. We expect more stability in demand and supply to set in by February-March this year for flat products. However, for long products, where most of the manufacturers are smaller players, it will perhaps take a bit longer,” Hazra said.

According to VR Sharma, Managing Director JSPL, the demand is expected to outperform supply in 2021. "The prices have increased at the moment but after March, we expect them to be stable or soften. This is largely because the government has asked NMDC to reduce iron ore price. If that happens, the steel prices will reduce,” he noted.

Echoing similar views, ratings agency India Ratings and Research Senior Analyst Akash Krishnatry said, “we are expecting more stability in terms of demand and supply as the production of steel and iron ore has picked up. Therefore, I don't think there will be a further hike. Since the iron ore supplies have increased in November and December, price stability has come from there also.”

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