What Is Causing The Steel Price Rise?
Following a sustained downward trend, Indian steel prices have been inching up for the last couple of months. Any fluctuation in the price of a commodity is because of 2 basic reasons.
1. Supply-demand imbalances
2. Fluctuations in costs of producers.
When considering a price rise, it is caused either by a demand pull or a cost push i.e Increase in demand creates a shortage of supply ( or vice versa) hence the price rises, or, increase in production costs forces producers to increase prices. A cost push.
Now the recent rise in steel prices is due to multiple reasons. First we'll look at the supply chain factor. The Indian steel supply chain ( Distributors, retailers etc) had been involved in "de-stocking" of their inventory as a part of their inventory management. This meant lower sales for steel producers in India as the suppliers were clearing their inventory and not buying as much steel. The de-stocking was perceived to be nearly complete at October end 2019. After which, it is safe to assume, the suppliers turned towards steel producers to buy fresh inventory. This reflects in Indian steel producers' Q3 results ( September- December ) which showed lower sales and lower price realisations Y-o-Y. Retail consumption of steel in Q3 shows a different picture where it increases by 16% Y-o-Y and 33 Q-o-Q.
This can be explained only by de-stocking process, while consumption is up, sales of producers haven't picked up.
Sentiment has also improved after October lows with the government announcing NIP ( national infatructure pipeline) envisaging and fast tracking 100 lakh crore spending towards infrastructure.
A major driver of the price rise is the increase in international raw material prices in the past couple of months. The cfr China import prices of iron ore for 62% Fe which was ruling at $86/tonne in October 2019 rose to $96/tonne in January 2020, a growth of 11.6% within 3 months.
NMDC & Coal India ltd, the country's largest coal producer also increased prices hence increasing the producers' input cost.
This combination of fresh buying after de-stocking at a time when raw material prices are going up and business sentiments improving has been a driving force behind the recent price rise.
China being the largest steel producer by far has been the benefactor of raw material producers with its constantly increasing steel production. By creating heavy demand for raw materials like iron ore, China sustained increases in raw material prices. Any slowdown in Chinese steel production ( Like the case now where production is stopped due to corona virus lock down) will soften raw material prices internationally thus softening steel prices as well. But, with heavy foreseeable govt and retail demand for steel in India and govt protections for Indian steel industry against China, the scale is bent towards the prices going up for now.