Friday, February 24, 2012: 01:36:38 PM

TJCD Guest Column

Declining rupee has shot up steel prices, affecting construction: Priyanka Gupta of MPIL Steel Structures

Rupee depreciation has raised cost of imports and Indian steel industry relies largely on overseas procurement of coke, a key ingredient in steel making; domestic steel prices have gone up affecting steel-intensive construction

Falling rupee has major impact on India’s export-import trade. This is because when the rupee depreciates, imports become dearer and India's exports become more competitive. So exports (X) gradually start moving northwards and imports (M) gradually start going down. The net gain in X-M is a step up in demand in the local economy. In this fashion, rupee depreciation is good for aggregate demand (and conversely rupee appreciation pulls back demand). However, these effects are small and take place with long lags.

 
Rupee depreciation, however, increases domestic prices of some trade items like steel. For instance, the price at which a buyer and seller of steel transact is the global price of steel (which is quoted in dollars) multiplied by the INR/USD exchange rate. This situation is called ‘import parity pricing' and in such a scenario domestic price of trade items like steel goes up when the rupee depreciates.
 
Impact on steel construction
 
The depreciating rupee would benefit companies in the metals & mining sector because prices of their products such as copper, lead, aluminum and zinc are linked to international prices.
 
However, the same is not the case for iron & steel companies such as SAIL and Tata Steel.Coke is the key ingredient in steel making. The falling rupee against the dollar is making it difficult to procure coal from abroad, thereby affecting importers of coal and coking coal.
 
Many Indian steel makers depend largely on coke imports. Industry estimates show that the import is to the extent of three-fourths of their total coking coal requirement. Also, domestic steel prices have gone up, since steel makers attempt to pass on the hike to customers. In this light, it is positive for steel makers, since their loss from higher import costs is much lower than the revenues they make from selling steel in the domestic market.
 
The weak rupee will have a negative impact on companies that have imported heavily, since their cost of funds will go up.
 
Taking a macro view, projected investment in infrastructure creation — comprising power, roads, telecommunication, railways, irrigation, water supply, ports, airports — stands at US$514 billion during the Eleventh Five Year Plan (2007-12). All these projects would inherently require steel for construction. Hence, increase in prices of steel specifically due to exchange rate can moderate the growth of infrastructure projects.
 
Imported steel is exhausted, leading to an increase in prices of the same and in addition to that rupee depreciation has made it even costlier. This ultimately has created a pressure on supply side and steel manufacturers have raised prices. At MPIL Steel Structures Ltd, we have good tie-ups with local steel manufacturers and due to close accessibility we are relatively cushioned against the recent hike in prices. Besides, we do not use imported steel products in a major way.
 
To conclude, steel and steel-intensive construction is the future of the country’s infrastructure and the current rupee fall is temporary. In this light, we expect a correction in steel prices in the near future.
 
 
Priyanka Gupta, Executive Director, MPIL Steel Structures Ltd, a reputed turnkey solution provider for metal building products and integrated structural steel fabrication located in Mumbai

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