The Hindu Business Line : Higher steel prices have limited impact on end-users: Crisil

THE firmness in steel prices over the last one-year has not seriously impacted the end-users of steel as it is widely believed to be, a study by Crisil has revealed. On the contrary, firm steel prices have helped the steel industry to clear its debt.

Higher steel prices have only a limited impact on end-user segments such as auto and auto ancillaries, Crisil said. "In the case of cars, for example, on an average, it takes about 500 to 600 kilograms of steel to produce a car. Given that steel prices have increased by about Rs 5,000 per tonne over the last year - cold-rolled steel is priced at about Rs 30,000 per tonne today compared to about Rs 25,000 in June 2002 - the incremental cost for a carmaker is only about Rs 2,500 per unit, which is less than 1 per cent of the car's price," the rating agency said.

In contrast, excise duties on cars have dropped to 24 per cent from 32 per cent since the beginning of fiscal 2004, resulting in savings of at least Rs 20,000 per car, which have not been fully passed on to consumers. "To that extent, the car manufacturers' profitability should not be impacted," Crisil said.

According to Crisil, steel constitutes less than 5 per cent of a car's total cost.

"Besides, most auto companies purchase steel on long-term contracts, which should cushion the impact of sudden price changes," Crisil said, adding that current steel prices are not yet at their peak as they have recently recovered from historically low prices.

In the case of construction industry, steel costs amount to less than 5 per cent of the total costs in the case of roads and 10 per cent in the case of buildings.

As for steel companies, an upturn in steel prices has helped in their financial performance. Should steel prices decline by even Rs 1,500-Rs 2,000 per tonne from prevailing levels, many steel companies would revert to losses given their high interest burden, Crisil said.

However, steel prices could edge down as the Chinese import quota is likely to be exhausted in the next few months.

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